<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 18, 2000
GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
California 77-0387041
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
COMMISSION FILE NUMBER: 0-25034
2860 West Bayshore Road, Palo Alto, California 94303
(Address of principal executive offices) (Zip Code)
(650) 813-8200
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER ITEMS.
On May 18, 2000, Greater Bay Bancorp (the "Registrant") completed a merger
with Coast Bancorp, the holding company of Coast Commercial Bank ("CCB") which
was accounted for as a pooling-of-interests. Shareholders of Coast Bancorp
received 0.6338 shares of the Registrant's Common Stock for each outstanding
share of Coast Bancorp Common Stock. A total of approximately 3,070,000
shares were issued in the transaction.
The supplemental consolidated financial statements filed herewith have been
prepared accounting for the merger using the pooling-of-interests method of
accounting. Upon publication of the Company's financial statements for a period
which includes May 18, 2000, these supplemental consolidated financial
statements will become the historical financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
EXHIBIT
NO. EXHIBITS
--- --------
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Restated Financial Data Schedules for quarters ended March 31, 2000
(included in electronic filing through EDGAR)
27.2 Restated Financial Data Schedules for quarters ended March 31, 1999
and June 30, 1999 (included in electronic filing through EDGAR)
27.3 Restated Financial Data Schedules for quarters ended September 30,
1999 and December 31, 1999 (included in electronic filing through
EDGAR)
27.4 Restated Financial Data Schedules for quarters ended March 31, 1998
and June 30, 1998 (included in electronic filing through EDGAR)
27.5 Restated Financial Data Schedules for quarters ended September 30,
1998 and December 31, 1998 (included in electronic filing through
EDGAR)
27.6 Restated Financial Data Schedules for the years ended December 31, 1999
and 1998 (included in electronic filing through EDGAR)
27.7 Restated Financial Data Schedules for the year ended December 31, 1997
(included in electronic filing through EDGAR)
99.1 Supplemental Consolidated Financial Statements and Supplementary Data
(restated to include Coast Bancorp and CCB)
For the Years Ended December 31, 1999, 1998 and 1997:
Selected Financial Data
Management's Discussion and Analysis
Supplemental Consolidated Balance Sheet as of December 31, 1999 and
1998
Supplemental Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Supplemental Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997
2
<PAGE>
Supplemental Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Notes to Supplemental Consolidated Financial Statements
Report of Independent Accountants
99.2 Supplemental Consolidated Financial Statements and Supplementary Data
(restated to include Coast Bancorp and CCB)
For the Quarters Ended March 31, 2000 and 1999:
Management's Discussion and Analysis
Supplemental Consolidated Balance Sheet as of March 31, 2000 and
December 31, 1999
Supplemental Consolidated Statements of Operations for the Quarters
Ended March 31, 2000 and 1999
Notes to Supplemental Consolidated Financial Statements
3
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
AS AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREATER BAY BANCORP
(Registrant)
By:
/s/ Steven C. Smith
- -------------------
Steven C. Smith
Executive Vice President, Chief Administrative Officer and
Chief Financial Officer
Date: May 18, 2000
4
<PAGE>
EXHIBIT INDEX
Exhibits.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Restated Financial Data Schedules for quarters ended March 31, 2000
(included in electronic filing through EDGAR)
27.2 Restated Financial Data Schedules for quarters ended March 31, 1999
and June 30, 1999 (included in electronic filing through EDGAR)
27.3 Restated Financial Data Schedules for quarters ended September 30,
1999 and December 31, 1999 (included in electronic filing through
EDGAR)
27.4 Restated Financial Data Schedules for quarters ended March 31, 1998
and June 30, 1998 (included in electronic filing through EDGAR)
27.5 Restated Financial Data Schedules for quarters ended September 30,
1998 and December 31, 1998 (included in electronic filing through
EDGAR)
27.6 Restated Financial Data Schedules for the years ended December 31, 1999
and 1998 (included in electronic filing through EDGAR)
27.7 Restated Financial Data Schedules for the year ended December 31, 1997
(included in electronic filing through EDGAR)
99.1 Supplemental Consolidated Financial Statements and Supplementary Data
(restated to include Coast Bancorp and CCB)
For the Years Ended December 31, 1999, 1998 and 1997:
Selected Financial Data
Management's Discussion and Analysis
Supplemental Consolidated Balance Sheet as of December 31, 1999 and
1998
Supplemental Consolidated Statements of Operations for the Years Ended
December 31,1999, 1998 and 1997
Supplemental Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997
Supplemental Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Notes to Supplemental Consolidated Financial Statements
Report of Independent Accountants
99.2 Supplemental Consolidated Financial Statements and Supplementary Data
(restated to include Coast Bancorp and CCB)
For the Quarters Ended March 31, 2000 and 1999:
Management's Discussion and Analysis
Supplemental Consolidated Balance Sheet as of March 31, 2000 and
December 31, 1999
Supplemental Consolidated Statements of Operations for the Quarters
Ended March 31, 2000 and 1999
Notes to Supplemental Consolidated Financial Statements
5
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-30913, 333-67677, 333-30915, 333-16967, 333-
47747 and 333-30812), Form S-3 (Nos. 333-61679, 333-70025, 333-94343 and 333-
35622) and Form S-4 (No. 333-35576) of Greater Bay Bancorp of our report dated
May 18, 2000 relating to the supplemental consolidated financial statements,
which appears in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 154,301
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 308,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 479,817
<INVESTMENTS-CARRYING> 225,892
<INVESTMENTS-MARKET> 220,587
<LOANS> 2,295,673
<ALLOWANCE> (48,650)
<TOTAL-ASSETS> 3,607,237
<DEPOSITS> 3,159,100
<SHORT-TERM> 85,124
<LIABILITIES-OTHER> 58,698
<LONG-TERM> 71,500
0
0
<COMMON> 134,024
<OTHER-SE> 98,791
<TOTAL-LIABILITIES-AND-EQUITY> 3,607,237
<INTEREST-LOAN> 53,380
<INTEREST-INVEST> 11,552
<INTEREST-OTHER> 4,521
<INTEREST-TOTAL> 69,453
<INTEREST-DEPOSIT> 24,803
<INTEREST-EXPENSE> 27,537
<INTEREST-INCOME-NET> 41,916
<LOAN-LOSSES> 5,314
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 26,633
<INCOME-PRETAX> 25,980
<INCOME-PRE-EXTRAORDINARY> 25,980
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,508
<EPS-BASIC> 0.91
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 5.25
<LOANS-NON> 6,203
<LOANS-PAST> 10
<LOANS-TROUBLED> 743
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,147
<CHARGE-OFFS> (1,791)
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 48,650
<ALLOWANCE-DOMESTIC> 48,650
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999
<CASH> 114,292 133,379
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 153,400 170,800
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 428,684 441,764
<INVESTMENTS-CARRYING> 104,985 102,432
<INVESTMENTS-MARKET> 104,985 102,432
<LOANS> 1,644,263 1,780,348
<ALLOWANCE> (30,748) (33,016)
<TOTAL-ASSETS> 2,595,021 2,787,918
<DEPOSITS> 2,257,774 2,423,126
<SHORT-TERM> 73,448 97,135
<LIABILITIES-OTHER> 31,485 32,021
<LONG-TERM> 65,000 65,000
0 0
0 0
<COMMON> 97,777 100,022
<OTHER-SE> 69,537 70,614
<TOTAL-LIABILITIES-AND-EQUITY> 2,595,021 2,787,918
<INTEREST-LOAN> 36,370 39,859
<INTEREST-INVEST> 7,466 8,256
<INTEREST-OTHER> 2,350 3,399
<INTEREST-TOTAL> 46,186 51,514
<INTEREST-DEPOSIT> 15,299 17,335
<INTEREST-EXPENSE> 17,580 19,952
<INTEREST-INCOME-NET> 28,606 31,562
<LOAN-LOSSES> 1,163 1,917
<SECURITIES-GAINS> 61 (9)
<EXPENSE-OTHER> 18,637 22,197
<INCOME-PRETAX> 13,400 12,163
<INCOME-PRE-EXTRAORDINARY> 13,400 12,163
<EXTRAORDINARY> (88) 0
<CHANGES> 0 0
<NET-INCOME> 8,032 6,562
<EPS-BASIC> 0.50 0.40
<EPS-DILUTED> 0.47 0.38
<YIELD-ACTUAL> 5.14 5.02
<LOANS-NON> 4,137 5,578
<LOANS-PAST> 0 209
<LOANS-TROUBLED> 951 1,034
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 29,831 30,748
<CHARGE-OFFS> (298) (321)
<RECOVERIES> 52 226
<ALLOWANCE-CLOSE> 30,748 33,016
<ALLOWANCE-DOMESTIC> 30,748 33,016
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 OCT-01-1999
<PERIOD-END> SEP-30-1999 DEC-31-1999
<CASH> 140,488 125,886
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 203,900 215,550
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 439,438 444,897
<INVESTMENTS-CARRYING> 127,235 141,725
<INVESTMENTS-MARKET> 127,235 136,481
<LOANS> 1,936,517 2,129,489
<ALLOWANCE> (36,696) (44,147)
<TOTAL-ASSETS> 2,991,438 3,216,096
<DEPOSITS> 2,642,281 2,806,999
<SHORT-TERM> 17,178 63,600
<LIABILITIES-OTHER> 37,439 51,863
<LONG-TERM> 117,000 87,000
0 0
0 0
<COMMON> 101,555 122,152
<OTHER-SE> 79,985 84,482
<TOTAL-LIABILITIES-AND-EQUITY> 2,991,438 3,216,096
<INTEREST-LOAN> 44,120 48,939
<INTEREST-INVEST> 9,269 9,894
<INTEREST-OTHER> 3,022 4,655
<INTEREST-TOTAL> 56,411 63,489
<INTEREST-DEPOSIT> 19,460 22,132
<INTEREST-EXPENSE> 21,654 24,642
<INTEREST-INCOME-NET> 34,757 38,847
<LOAN-LOSSES> 3,752 6,232
<SECURITIES-GAINS> 4 (23)
<EXPENSE-OTHER> 20,442 33,712
<INCOME-PRETAX> 17,096 21,035
<INCOME-PRE-EXTRAORDINARY> 17,096 16,236
<EXTRAORDINARY> 0 3,995
<CHANGES> 0 0
<NET-INCOME> 10,642 12,241
<EPS-BASIC> 0.65 0.74
<EPS-DILUTED> 0.61 0.70
<YIELD-ACTUAL> 5.18 5.23
<LOANS-NON> 7,864 5,516
<LOANS-PAST> 353 51
<LOANS-TROUBLED> 1,492 807
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 33,016 36,696
<CHARGE-OFFS> (879) (1,415)
<RECOVERIES> 804 339
<ALLOWANCE-CLOSE> 36,696 44,147
<ALLOWANCE-DOMESTIC> 36,696 44,147
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998
<CASH> 120,581 126,836
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 121,700 182,100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 314,453 429,723
<INVESTMENTS-CARRYING> 60,113 53,054
<INVESTMENTS-MARKET> 60,113 53,054
<LOANS> 1,179,724 1,237,591
<ALLOWANCE> (23,879) (25,470)
<TOTAL-ASSETS> 1,936,202 2,179,849
<DEPOSITS> 1,627,285 1,881,690
<SHORT-TERM> 112,361 110,592
<LIABILITIES-OTHER> 33,149 19,832
<LONG-TERM> 23,000 23,000
0 0
0 0
<COMMON> 78,634 91,687
<OTHER-SE> 61,773 53,048
<TOTAL-LIABILITIES-AND-EQUITY> 1,936,202 2,179,849
<INTEREST-LOAN> 29,556 31,426
<INTEREST-INVEST> 5,804 6,197
<INTEREST-OTHER> 2,902 3,606
<INTEREST-TOTAL> 38,262 41,229
<INTEREST-DEPOSIT> 12,321 13,534
<INTEREST-EXPENSE> 14,468 15,996
<INTEREST-INCOME-NET> 23,794 25,233
<LOAN-LOSSES> 1,251 1,732
<SECURITIES-GAINS> (7) 68
<EXPENSE-OTHER> 16,624 18,221
<INCOME-PRETAX> 9,971 9,600
<INCOME-PRE-EXTRAORDINARY> 9,971 9,600
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,423 5,982
<EPS-BASIC> 0.41 0.38
<EPS-DILUTED> 0.38 0.35
<YIELD-ACTUAL> 5.61 5.48
<LOANS-NON> 4,375 4,277
<LOANS-PAST> 407 85
<LOANS-TROUBLED> 1,372 1,000
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 23,563 23,879
<CHARGE-OFFS> (1,076) (300)
<RECOVERIES> 141 66
<ALLOWANCE-CLOSE> 23,879 25,470
<ALLOWANCE-DOMESTIC> 23,879 25,470
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 OCT-01-1998
<PERIOD-END> SEP-30-1998 DEC-31-1998
<CASH> 105,745 112,843
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 154,500 100,200
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 454,645 420,830
<INVESTMENTS-CARRYING> 108,809 101,718
<INVESTMENTS-MARKET> 108,809 101,718
<LOANS> 1,304,647 1,483,088
<ALLOWANCE> (28,006) (29,831)
<TOTAL-ASSETS> 2,287,594 2,373,965
<DEPOSITS> 1,954,813 2,039,117
<SHORT-TERM> 104,110 93,845
<LIABILITIES-OTHER> 22,709 28,980
<LONG-TERM> 53,000 53,000
0 0
0 0
<COMMON> 93,802 95,697
<OTHER-SE> 59,160 63,326
<TOTAL-LIABILITIES-AND-EQUITY> 2,287,594 2,373,965
<INTEREST-LOAN> 32,759 34,160
<INTEREST-INVEST> 8,034 7,705
<INTEREST-OTHER> 3,955 3,403
<INTEREST-TOTAL> 44,748 45,268
<INTEREST-DEPOSIT> 15,536 14,770
<INTEREST-EXPENSE> 17,839 17,277
<INTEREST-INCOME-NET> 26,909 27,991
<LOAN-LOSSES> 2,287 2,201
<SECURITIES-GAINS> 15 328
<EXPENSE-OTHER> 17,680 18,804
<INCOME-PRETAX> 11,235 12,133
<INCOME-PRE-EXTRAORDINARY> 11,235 12,133
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,274 8,010
<EPS-BASIC> 0.46 0.50
<EPS-DILUTED> 0.42 0.47
<YIELD-ACTUAL> 5.19 5.13
<LOANS-NON> 3,290 3,226
<LOANS-PAST> 18 0
<LOANS-TROUBLED> 846 796
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 25,470 28,006
<CHARGE-OFFS> (193) (623)
<RECOVERIES> 258 200
<ALLOWANCE-CLOSE> 28,006 29,831
<ALLOWANCE-DOMESTIC> 28,006 29,831
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 125,886 112,843
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 215,550 100,200
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 442,290 419,327
<INVESTMENTS-CARRYING> 141,725 102,108
<INVESTMENTS-MARKET> 136,481 103,028
<LOANS> 2,129,489 1,483,087
<ALLOWANCE> (44,147) (29,831)
<TOTAL-ASSETS> 3,216,096 2,373,965
<DEPOSITS> 2,806,999 2,039,117
<SHORT-TERM> 63,600 19,395
<LIABILITIES-OTHER> 51,863 28,980
<LONG-TERM> 87,000 127,450
0 0
0 0
<COMMON> 122,152 95,707
<OTHER-SE> 84,482 63,316
<TOTAL-LIABILITIES-AND-EQUITY> 3,216,096 2,373,965
<INTEREST-LOAN> 169,286 128,252
<INTEREST-INVEST> 34,688 28,588
<INTEREST-OTHER> 13,625 13,192
<INTEREST-TOTAL> 217,599 170,032
<INTEREST-DEPOSIT> 74,227 56,152
<INTEREST-EXPENSE> 83,830 65,581
<INTEREST-INCOME-NET> 133,769 104,451
<LOAN-LOSSES> 13,064 7,459
<SECURITIES-GAINS> 33 395
<EXPENSE-OTHER> 102,915 71,547
<INCOME-PRETAX> 55,766 42,802
<INCOME-PRE-EXTRAORDINARY> 55,766 42,802
<EXTRAORDINARY> (88) 0
<CHANGES> 0 0
<NET-INCOME> 37,477 27,715
<EPS-BASIC> 2.29 1.75
<EPS-DILUTED> 2.17 1.63
<YIELD-ACTUAL> 5.15 5.35
<LOANS-NON> 5,516 3,226
<LOANS-PAST> 51 0
<LOANS-TROUBLED> 807 796
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 29,831 23,563
<CHARGE-OFFS> (2,914) (1,936)
<RECOVERIES> 1,421 562
<ALLOWANCE-CLOSE> 44,147 29,831
<ALLOWANCE-DOMESTIC> 44,147 29,831
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,853
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 282,839
<INVESTMENTS-CARRYING> 68,872
<INVESTMENTS-MARKET> 70,043
<LOANS> 1,125,211
<ALLOWANCE> (23,563)
<TOTAL-ASSETS> 1,821,758
<DEPOSITS> 1,575,844
<SHORT-TERM> 30,070
<LIABILITIES-OTHER> 20,328
<LONG-TERM> 23,000
0
0
<COMMON> 80,919
<OTHER-SE> 54,451
<TOTAL-LIABILITIES-AND-EQUITY> 1,821,758
<INTEREST-LOAN> 105,652
<INTEREST-INVEST> 17,080
<INTEREST-OTHER> 11,536
<INTEREST-TOTAL> 134,268
<INTEREST-DEPOSIT> 43,096
<INTEREST-EXPENSE> 48,152
<INTEREST-INCOME-NET> 86,116
<LOAN-LOSSES> 7,991
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 60,829
<INCOME-PRETAX> 32,602
<INCOME-PRE-EXTRAORDINARY> 32,602
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,354
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 5.84
<LOANS-NON> 4,292
<LOANS-PAST> 158
<LOANS-TROUBLED> 1,533
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,308
<CHARGE-OFFS> (2,382)
<RECOVERIES> 295
<ALLOWANCE-CLOSE> 23,563
<ALLOWANCE-DOMESTIC> 23,563
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
SELECTED FINANCIAL INFORMATION
The following table represents the selected financial information at and for the
five years ended December 31, 1999:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1999* 1998* 1997* 1996* 1995*
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Interest income $ 217,599 $ 170,032 $ 134,268 $ 101,547 $ 87,391
Interest expense 83,830 65,581 48,152 33,853 28,686
---------------------------------------------------------------
Net interest income 133,769 104,451 86,116 67,694 58,706
Provision for loan losses 13,064 7,459 7,991 4,110 2,296
---------------------------------------------------------------
Net interest income after provision for loan losses 120,705 96,992 78,125 63,584 56,409
Other income 23,468 16,412 14,144 13,347 9,901
Nonrecurring - warrant income 14,508 945 1,162 92 -
---------------------------------------------------------------
Total other income 37,976 17,357 15,306 13,439 9,901
Operating expenses 80,424 67,545 57,496 52,511 49,590
Other expenses - nonrecurring 12,160 1,341 - - -
---------------------------------------------------------------
Total operating expenses 92,584 68,886 57,496 52,511 49,590
---------------------------------------------------------------
Income before income tax expense, merger and other related
nonrecurring costs & extraordinary items 66,097 45,463 35,935 24,512 16,720
Income tax expense 22,046 16,074 13,299 9,044 6,279
---------------------------------------------------------------
Income before merger and other related nonrecurring costs and
extraordinary items 44,051 29,389 22,636 15,468 10,441
Merger and other related nonrecurring costs, net of tax (6,486) (1,674) (2,282) (1,991) -
---------------------------------------------------------------
Net income before extraordinary items 37,565 27,715 20,354 13,477 10,441
Extraordinary items (88) - - - -
---------------------------------------------------------------
Net income $ 37,477 $ 27,715 $ 20,354 $ 13,477 $ 10,441
===============================================================
Per Share Data (1)
Income per share (before merger, nonrecurring and
extraordinary items)
Basic $ 2.42 $ 1.84 $ 1.39 $ 1.04 $ 0.82
Diluted 2.28 1.71 1.29 1.00 0.79
Net income per share
Basic $ 2.29 $ 1.75 $ 1.34 $ 0.91 $ 0.72
Diluted 2.17 1.63 1.25 0.87 0.70
Cash dividends per share (2) $ 0.48 $ 0.38 $ 0.30 $ 0.22 $ 0.20
Book value per common share 12.14 9.99 8.66 7.69 7.12
Shares outstanding at year end 17,019,474 15,923,322 15,627,493 14,860,819 14,527,324
Average common shares outstanding 16,341,000 15,798,000 15,241,000 14,854,000 14,415,000
Average common and common equivalent shares outstanding 17,284,000 16,995,000 16,328,000 15,466,000 14,894,000
Performance Ratios
Return on average assets (before merger, nonrecurring and
extraordinary items) 1.41% 1.37% 1.33% 1.29% 1.28%
Return on average common shareholders' equity (before merger,
nonrecurring and extraordinary items) 22.49% 19.90% 16.75% 14.16% 13.18%
Return on average assets 1.34% 1.31% 1.28% 1.12% 1.14%
Return on average common shareholders' equity 21.34% 18.97% 16.13% 12.34% 11.68%
Net interest margin (3) 5.15% 5.35% 5.84% 6.18% 7.07%
Balance sheet Data - At Period End
Assets $ 3,216,096 $ 2,373,965 $ 1,821,758 $ 1,412,279 $ 1,097,761
Loans, net 2,085,342 1,453,256 1,103,149 860,059 637,696
Investment securities 607,933 529,525 351,964 243,290 251,211
Deposits 2,806,999 2,039,117 1,575,844 1,233,282 951,218
Subordinated debt - 3,000 3,000 3,000 3,000
Trust Preferred Securities 50,000 50,000 20,000 - -
Common Shareholders' equity 206,634 159,023 135,370 114,267 103,377
Asset Quality Ratios
Nonperforming assets to total loans and OREO 0.31% 0.34% 0.67% 1.39% 1.88%
Nonperforming assets to total assets 0.21% 0.21% 0.41% 0.87% 1.12%
Allowance for loan losses to total loans 2.07% 2.01% 2.09% 1.86% 1.84%
Allowance for loan losses to non-
performing assets 664.36% 598.06% 313.17% 133.10% 97.36%
Net charge-offs to average loans 0.08% 0.11% 0.21% 0.06% 0.27%
Regulatory Capital Ratios
Leverage Ratio 8.02% 8.24% 9.61% 8.63% 11.24%
Tier 1 Capital 9.56% 10.34% 11.38% 11.07% 13.22%
Total Capital 10.95% 12.38% 12.79% 12.57% 14.82%
</TABLE>
*Restated on a historical basis to reflect the mergers between Greater Bay
Bancorp and CNB, PBC, PRB (the parent of Golden Gate), PBFC, BA Bancshares (the
parent of BAB), BCS (the parent of BBC), Coast Bancorp (the parent of CCB) and
MD Bancshares (the parent of MDNB) on a pooling-of-interests basis.
(1) Restated to reflect 2-for-1 stock split effective as of April 30, 1998.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay.
(3) Net interest margin for 1999, 1998 and 1997 includes the lower spread earned
on the FBC Special Deposit (see Note 7 to the Financial Statements for
details). Excluding the FBC Special Deposit, net interest margin would have
been 5.41%, 5.65%, 6.18% and 6.29% for 1999, 1998, 1997 and 1996,
respectively.
A-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company", on a consolidated basis) is a bank holding company operating Bay Area
Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"),
Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula
Bank ("MPB") Mt. Diablo National Bank ("MDNB") and Peninsula Bank of Commerce
("PBC"). The Company also owns and GBB Capital I and GBB Capital II, both of
which are Delaware statutory business trusts, which were formed for the
exclusive purpose of issuing and selling Cumulative Trust Preferred Securities
("TPS"). Greater Bay also includes the operating divisions: Greater Bay Bank
Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Santa
Clara Valley Commercial Banking Group, Greater Bay Bank SBA Lending Group,
Greater Bay Corporate Finance Group, Greater Bay International Banking Division,
Greater Bay Trust Company, Pacific Business Funding and the Venture Banking
Group. The Company provides a wide range of commercial banking services to small
and medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. The Company operates throughout
Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 27
offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont,
Hayward, Lafayette, Millbrae, Palo Alto, Pleasanton, Redwood City, San
Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz,
Scotts Valley, Walnut Creek and Watsonville. At December 31, 1999, the Company
had total assets of $3.2 billion, total net loans of $2.1 billion and total
deposits of $2.8 billion.
All of the Company's mergers were accounted for as a pooling-of-interests
and, accordingly, all of the financial information for the Company for the
periods prior to the mergers has been restated as if the mergers had occurred at
the beginning of the earliest reporting period presented.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Financial Information" and the Company's consolidated financial data
included elsewhere in this document. Certain statements under this caption
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in such
forward-looking statements. Factors that might cause such a difference include
but are not limited to economic conditions, competition in the geographic and
business areas in which the Company conducts its operations, fluctuation in
interest rates, credit quality and government regulation.
RESULTS OF OPERATIONS
The Company's operating results included merger, nonrecurring and
extraordinary items of $7.9 million ($2.0 million net of tax), $3.1 million
($1.4 million net of tax) and $884,000 ($788,000 net of tax) in 1999, 1998 and
1997, respectively. The following table summarizes net income, net income per
share and key financial ratios before and after merger, nonrecurring and
extraordinary items for the years presented.
<TABLE>
<CAPTION>
Before merger, nonrecurring and extraordinary items
---------------------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 39,488 $ 29,072 $ 21,142
Net income per share:
Basic $ 2.42 $ 1.84 $ 1.39
Diluted $ 2.28 $ 1.71 $ 1.29
Return on average assets 1.41% 1.37% 1.33%
Return on average shareholders' equity 22.49% 19.90% 16.75%
<CAPTION>
After merger, nonrecurring and extraordinary items
--------------------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 37,477 $ 27,715 $ 20,354
Net income per share:
Basic $ 2.29 $ 1.75 $ 1.34
Diluted $ 2.17 $ 1.63 $ 1.25
Return on average assets 1.34% 1.31% 1.28%
Return on average shareholders' equity 21.34% 18.97% 16.13%
</TABLE>
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company reported net income of $37.5 million in 1999, a 35.2%
increase over 1998 net income of $27.7 million. The net income in 1998 was a
36.2% increase over 1997 income of $20.4 million. Basic net income per share was
$2.29 for 1999, as compared to $1.75 for 1998 and $1.34 for 1997. Diluted net
income per share was $2.17, $1.63 and $1.25 for 1999, 1998 and 1997,
respectively. The return on average assets and return on average shareholders'
equity were 1.34% and 21.34% in 1999, compared with 1.31% and 18.97% in 1998 and
1.28% and 16.13% in 1997, respectively.
The 35.2% increase in 1999 net income as compared to 1998 was the result of
significant growth in loans, investments, trust assets and deposits. In 1999,
net interest income, excluding Trust Preferred Securities issued ("capital
securities"), increased 28.6% as compared to 1998. This increase was primarily
due to a 32.9% increase in average interest-earning assets in 1999 compared to
the prior year. The impact on income of the increase in average interest-
earning assets was partially offset by the decline the net yield earned on
interest-earning assets to 5.32% in 1999 as compared to 5.49% in 1998 (see "-
Net Interest Income" for additional information on the increase in net interest
income). The increases in loans, trust assets and deposits also contributed to
the 37.1% increase in trust fees, loan and international banking fees, service
charges and other fees. Other income includes $4.0 million in appreciation
recognized on the conversion of equity securities received in the settlement of
a loan into a publicly traded equity security. Increases in operating expenses
were required to service and support the Company's growth. As a result,
increases in revenue were partially offset in 1999 by a 19.1% increase in
recurring operating expenses, as compared to 1998.
Net income in 1999 included nonrecurring expenses, net of nonrecurring
income and taxes, of $2.0 million, an increase of $654,000 compared to 1998. In
1999, merger and related nonrecurring costs were $6.5 million, an increase of
$4.8 million from 1998. Warrant income, net of related expenses and taxes, was
$5.8 million in 1999, an increase of $5.3 million compared to 1998. In 1999, the
Company donated $7.8 million in appreciated securities to the Greater Bay
Bancorp Foundation. This resulted in $1.2 million in donation expense, net of a
tax benefit derived on the transaction, which is a $1.0 million increase
compared to 1998.
The 36.2% increase in 1998 net income as compared to 1997 was the result of
significant growth in loans, investments, trust assets and deposits. In 1998,
net interest income, excluding capital securities, increased 22.5% as compared
to 1997. This increase was primarily due to a 32.6% increase in average
interest-earning assets in 1998 compared to the prior year. The impact on
income of the increase in average interest-earning assets was partially offset
by the decline the net yield earned on interest-earning assets to 5.49% in 1998
as compared to 5.94% in 1997 (see "- Net Interest Income" for additional
information on the increase in net interest income). The increases in loans,
trust assets and deposits also contributed to the 4.3% increase in trust fees,
loan and international banking fees, service charges and other fees. Increases
in operating expenses were required to service and support the Company's growth.
As a result, increases in revenue were partially offset in 1998 by a 17.5%
increase in recurring operating expenses, as compared to 1997.
Net income in 1998 included nonrecurring expenses, net of nonrecurring
income and taxes, of $1.4 million, an increase of $569,000 compared to 1997. In
1998, merger and related nonrecurring costs were $1.7 million, a decrease of
$608,000 from 1997. Warrant income, net of related expenses and taxes, was
$554,000 in 1998, a decrease of $155,000 compared to 1997. In 1998, the Company
donated $1.3 million in appreciated securities to the Greater Bay Bancorp
Foundation. This resulted in $237,000 in donation expense, net of a tax benefit
derived on the transaction. There was no such donation in 1997. In 1997, the
Company had nonrecurring income of $1.0 million, net of taxes, related to
payment from an insurance carrier of a litigation settlement charge taken in
1995.
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income
Net interest income, excluding capital securities, increased 28.6% to
$138.0 million in 1999 from $107.3 million in 1998. This increase was primarily
due to the $642.6 million, or 32.9%, increase in average interest-earning assets
which was partially offset by a 17 basis point decrease in the Company's net
yield on interest-earning assets. Net interest income, excluding capital
securities, increased 22.5% in 1998 from $87.6 million in 1997. This increase
was primarily due to the $479.8 million, or 32.6%, increase in average interest-
earning assets, which was partially offset by the 45 basis point decrease in the
Company's net yield on interest-earning assets. The capital securities were
Trust Preferred Securities issued in 1997 and 1998 which cost 8.54% and 9.00% in
1999 and 1998, respectively. Including the capital securities, net interest
income increased 28.1% to $133.8 million in 1999, and 21.3% to $104.5 million in
1998. The capital securities were issued primarily as a source of capital and
not as a source of liquidity.
The following table presents, for the years indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average
daily balances.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate
- ---------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
- -----------------------
Fed funds sold $ 188,495 $ 9,769 5.18% $ 144,072 $ 7,719 5.36%
Other short term securities 71,282 3,856 5.41% 97,264 5,473 5.63%
Investment securities:
Taxable 446,669 30,023 6.72% 411,731 25,318 6.15%
Tax-exempt (3) 94,468 4,665 4.94% 65,138 3,270 5.02%
Loans (2) 1,794,853 169,286 9.43% 1,234,914 128,252 10.39%
---------- -------- ---------- --------
Total interest-earning assets 2,595,767 217,599 8.38% 1,953,119 170,032 8.71%
Noninterest-earning assets 211,092 163,632
---------- -------- ---------- --------
Total assets $2,806,859 217,599 $2,116,751 170,032
========== -------- ========== --------
INTEREST-BEARING LIABILITIES:
- ----------------------------
Deposits:
MMDA, NOW and Savings $1,437,331 49,639 3.45% $1,031,612 36,170 3.51%
Time deposits, over $100,000 404,436 19,202 4.75% 274,440 14,109 5.14%
Other time deposits 114,504 5,386 4.70% 126,377 5,873 4.65%
---------- -------- ---------- --------
Total interest-bearing deposits 1,956,271 74,227 3.79% 1,432,429 56,152 3.92%
Other borrowings 93,708 5,264 5.62% 99,857 6,234 6.24%
Subordinated debt 607 68 11.20% 3,000 345 11.50%
---------- -------- ---------- --------
Total interest-bearing liabilities 2,050,586 79,559 3.88% 1,535,286 62,731 4.09%
Trust Preferred Securities 50,000 4,271 8.54% 31,671 2,850 9.00%
---------- -------- ---------- --------
Total interest-bearing liabilities
and capital securities 2,100,586 83,830 3.99% 1,566,957 65,581 4.19%
Noninterest-bearing deposits 496,466 381,618
Other noninterest-bearing liabilities 34,207 22,101
Shareholders' equity 175,600 146,075
---------- ----------
Total liabilities and shareholders'
equity $2,806,859 83,830 $2,116,751 65,582
========== -------- ========== --------
Net interest income $133,769 $104,451
======== ========
Including capital securities:
- ----------------------------
Interest rate spread 4.39% 4.52%
Contribution of interest free funds 0.76% 0.83%
Net yield on interest-earnings assets(4) 5.15% 5.35%
Excluding capital securities:
- ----------------------------
Interest rate spread 4.50% 4.62%
Contribution of interest free funds 0.82% 0.87%
Net yield on interest-earnings assets(4) 5.32% 5.49%
<CAPTION>
------------------------------------
1997
------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance (1) Interest Rate
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
- -----------------------
Fed funds sold $ 115,872 $ 6,250 5.39%
Other short term securities 97,586 5,198 5.33%
Investment securities:
Taxable 236,526 15,767 6.67%
Tax-exempt (3) 30,109 1,401 4.65%
Loans (2) 993,249 105,652 10.64%
---------- --------
Total interest-earning assets 1,473,342 134,268 9.11%
Noninterest-earning assets 115,640
---------- --------
Total assets $1,588,982 134,268
========== --------
INTEREST-BEARING LIABILITIES:
- ----------------------------
Deposits:
MMDA, NOW and Savings $ 785,891 27,426 3.49%
Time deposits, over $100,000 182,701 9,322 5.10%
Other time deposits 127,698 6,348 4.97%
---------- --------
Total interest-bearing deposits 1,096,290 43,096 3.93%
Other borrowings 46,252 3,248 7.02%
Subordinated debt 3,000 345 11.50%
---------- --------
Total interest-bearing liabilities 1,145,542 46,689 4.08%
Trust Preferred Securities 15,000 1,463 9.75%
---------- --------
Total interest-bearing liabilities
and capital securities 1,160,542 48,152 4.15%
Noninterest-bearing deposits 286,963
Other noninterest-bearing liabilities 15,276
Shareholders' equity 126,201
----------
Total liabilities and shareholders'
equity $1,588,982 48,152
========== --------
Net interest income $ 86,116
========
Including capital securities:
- ----------------------------
Interest rate spread 4.96%
Contribution of interest free funds 0.88%
Net yield on interest-earnings assets(4) 5.84%
Excluding capital securities:
- ----------------------------
Interest rate spread 5.04%
Contribution of interest free funds 0.90%
Net yield on interest-earnings assets(4) 5.94%
</TABLE>
(1) Nonaccrual loans are excluded from the average balance and only collected
interest on accrual loans is included in the interest column.
(2) Loan fees totaling $6.3 million, $5.6 million and $5.5 million are included
in loan interest income for 1999, 1998 and 1997, respectively.
(3) Tax equivalent yields earned on the tax exempt securities are 7.17%, 7.27%
and 6.72% for the years ended December 31, 1999, 1998 and 1997,
respectively, using the federal statutory rate of 34%.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
A-4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared with December 31, 1998 Compared with December 31, 1997
favorable (unfavorable) favorable (unfavorable)
-------------------------------- ----------------------------------
(Dollars in thousands) (1) (2) Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fed funds sold $ 2,294 $ (244) $ 2,050 $ 1,452 $ 17 $ 1,469
Other short term securities (1,425) (192) (1,617) (19) 294 275
Investment securities:
Taxable 2,304 2,401 4,705 10,384 (833) 9,551
Tax-exempt 1,440 (45) 1,395 1,685 184 1,869
Loans 53,085 (12,052) 41,033 24,134 (1,533) 22,601
------- -------- ------- ------- ------- -------
Total interest-earning assets 57,698 (10,132) 47,566 37,636 (1,871) 35,765
------- -------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
MMDA, NOW and Savings 13,691 (223) 13,468 7,588 1,157 8,745
Time deposits, over $100,000 6,065 (972) 5,093 4,155 632 4,787
Other time deposits (571) 84 (487) (69) (406) (475)
------- -------- ------- -------- ------- -------
Total interest-bearing deposits 19,185 (1,111) 18,074 11,674 1,383 13,057
Other borrowings (368) (602) (970) 2,938 48 2,986
Subordinated debt (275) (2) (277) - - -
------- -------- ------- -------- ------- -------
Total interest-bearing liabilities 18,542 (1,715) 16,827 14,612 1,431 16,043
------- -------- ------- -------- ------- -------
Increase (decrease) in net interest income $39,156 $ (8,417) $30,739 $ 23,024 $(3,302) $19,722
======= ======== ======= ======== ======= =======
</TABLE>
(1) The change in interest income and expense not attributable to specific
volume and rate changes has been allocated proportionately between the
volume and rate changes.
(2) Excludes the impact of capital securities.
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the years indicated, a
summary of the changes in average asset and liability balances (volume) and
changes in average interest rates (rate).
Interest income in 1999 increased 28.0% to $217.6 million from $170.0
million in 1998. This was primarily due to the significant increase in loans,
the Company's highest yielding interest-earning asset, and investment
securities. Loan volume increases were the result of the continuing economic
improvement in the Company's market areas, as well as the addition of
experienced relationship managers and significant business development efforts
by the Company's relationship managers. The increase was partially offset by a
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $642.6 million, or 32.9%, to $2.6 billion in
1999, compared to $2.0 billion in 1998. Of this total increase, average loans
increased $560.0 million, or 45.3%, to $1.8 billion in 1999 from $1.2 billion in
1998. Investment securities, Federal funds sold and other short-term securities,
increased 11.5% to $800.9 million in 1999 from $718.2 million in 1998.
The average yield on interest-earning assets declined 33 basis points to
8.38% in 1999 from 8.71% in 1998 primarily due to a decline in the average yield
on loans which was caused by increased competition and the impact of the
Company's focus on slightly larger client credits that generally result in
improved client financial controls, but also result in tighter pricing. Loans
represented approximately 69.1% of total interest-earning assets in 1999
compared to 63.2% in 1998. The average yield on loans declined 96 basis points
to 9.43% in 1999 from 10.39% in 1998.
Interest expense, excluding capital securities, in 1999 increased 26.8% to
$79.6 million from $62.7 million in 1998. This increase was due to greater
volumes of interest-bearing liabilities coupled with slightly higher interest
rates paid on interest-bearing liabilities. Average interest-bearing liabilities
increased 33.6% to $2.1 billion in 1999 from $1.5 billion in 1998 due primarily
to the efforts of the Banks' relationship managers in generating core deposits
from their client relationships and the deposits derived from the activities of
the Greater Bay Trust Company and the Venture Banking Group.
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
During 1999, average noninterest-bearing deposits increased to $496.5
million from $381.6 million in 1998. However, due to the larger increase in
interest-bearing deposits, noninterest-bearing deposits decreased to 20.2% of
total deposits at year-end 1999, compared to 21.0% at year-end 1998.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.50% in 1999 from 4.62% in 1998, and the net
yield on interest-earning assets declined in 1999 to 5.32% from 5.49% in 1998.
Interest income increased 26.6% to $170.0 million in 1998 from $134.3
million in 1997, as a result of the increase in average interest-earning assets
offset by a decline in the yields earned. Average interest-earning assets
increased 32.6% to $2.0 billion in 1998 from $1.5 billion in 1997 principally as
a result of increase in loans. The yield on the higher volume of average
interest-earning assets declined 40 basis points to 8.71% in 1998 from 9.11% in
1997, primarily as a result of increased competition for loans.
Interest expense, excluding capital securities, in 1998 increased 34.4% to
$62.7 million from $46.7 million in 1997 primarily as a result of the increase
in the volume of interest-bearing liabilities and in the rates paid on interest-
bearing liabilities. Corresponding to the growth in average interest-earning
assets, average interest-bearing liabilities increased 34.0% to $1.5 billion in
1998 from $1.1 billion in 1997.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.62% in 1998 from 5.04% in 1997 and the net
yield on interest-earning assets declined to 5.49% in 1998 from 5.94% in 1997.
The Company's net yield on interest-earning assets was reduced by the
Special Deposit. The average deposit balances related to the Special Deposit
during 1999, 1998 and 1997 were $99.0 million, $90.0 million and $95.0 million,
respectively, on which the Company earned a spread of 3.1%, 2.25% and 2.5%,
respectively. Excluding the Special Deposit, the 1999, 1998, 1997 net yield on
interest-earning assets, excluding capital securities, would have been 5.41%,
5.65% and 6.18% respectively. The purchase of bank-owned life insurance ("BOLI")
also reduced the Company's net interest spread since the earnings of BOLI are
included in other income, while the cost of funding BOLI is included in interest
expense.
The Company incurred certain client service expenses with respect to its
noninterest-bearing liabilities. These expenses include messenger services,
check supplies and other related items that are included in operating expenses.
If these expenses had been included in interest expense, the Company's net yield
on interest-earning assets would have been as follows for each of the years
presented.
A-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average noninterest bearing demand deposits $496,466 $381,618 $286,963
Client service expenses 2,047 1,504 1,087
Client service expenses, as a percentage of average
noninterest bearing demand deposits 0.41 % 0.39 % 0.38 %
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 5.32 % 5.49 % 5.94 %
(excluding capital securities)
Impact of client service expense (0.08)% (0.07)% (0.07)%
------------------------------------
Adjusted net yield on interest-earning assets 5.24 % 5.42 % 5.87 %
====================================
</TABLE>
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its client service expenses.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. Periodic fluctuations in the provision
for loan losses result from management's assessment of the adequacy of the
allowance for loan losses; however, actual loan losses may vary from current
estimates.
Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for
a description of the systematic methodology employed by the Company in
determining an adequate allowance for loan losses.
The provision for loan losses in 1999 was $13.1 million, compared to $7.5
million in 1998 and $8.0 million in 1997. In addition, in connection with the
mergers, the Company made an additional provision for loan losses of $2.7
million, $183,000 and $1.4 million in 1999, 1998 and 1997, respectively, to
conform to the Company's allowance methodology. Although loans outstanding have
increased substantially, nonperforming loans, comprised of nonaccrual loans,
restructured loans, and accruing loans past due 90 days or more have remained
relatively low, totaling $6.4 million, or 0.30% of loans outstanding, at
December 31, 1999, from $4.0 million, or 0.27% of loans outstanding, at December
31, 1998 and $6.0 million, or 0.53% of loans outstanding, at December 31, 1997.
For further information on nonperforming and classified loans and the
allowance for loan losses, see-"Nonperforming and Classified Assets" herein.
A-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other Income
Total other income increased to $38.0 million in 1999, compared to $17.4
million in 1998 and $15.3 million in 1997. The following table sets forth
information by category of other income for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges and other fees $ 5,193 $ 4,263 $ 4,252
Trust fees 2,990 2,473 2,049
Loan and international banking fees 2,833 1,303 1,404
ATM network revenue 2,682 2,440 2,607
Gain on sale of SBA loans 2,029 3,488 2,189
Gain (loss) on investments, net 33 395 (18)
Other income 7,708 2,050 1,661
----------------------------------------------------
Total, recurring 23,468 16,412 14,144
Warrant income 14,508 945 1,162
----------------------------------------------------
Total $ 37,976 $ 17,357 $ 15,306
====================================================
</TABLE>
The increase in other income in 1999 was a result of $1.5 million increase
in loan and international banking fees, a $930,000 increase in service charges
and other fees, and a $517,000 increase in trust fees. These increases were a
result of significant growth in total loans, total deposits and trust assets.
Other income includes $4.0 million in appreciation recognized on the conversion
of equity securities received in the settlement of a loan into a publicly traded
equity security. As discussed further below, the warrant income resulted from
the sale of stock acquired from clients in connection with financing activities.
The increase in other income in 1998 was primarily the result of a $1.3
million increase in the gain on sale of Small Business Administration ("SBA")
loans and a $424,000 increase in trust fees. The increase in trust fees was due
to significant growth in assets under management by Greater Bay Trust Company.
Trust assets increased to $649.3 million at December 31, 1998, compared to
$577.7 million at December 31, 1997. The increase in the gain on sale of SBA
loans was due to an increase in the origination and subsequent sale of SBA
loans.
Other income in 1999, 1998 and 1997 included warrant income of $14.5
million, $945,000 and $1.2 million, net of related employee incentives of $7.3
million, $396,000 and $500,000, respectively. The Company occasionally receives
warrants to acquire common stock from companies that are in the start-up or
development phase. The Company holds approximately 100 warrant positions. The
timing and amount of income derived from the exercise and sale of client
warrants typically depend upon factors beyond the control of the Company, and
cannot be predicted with any degree of accuracy and are likely to vary
materially from period to period.
In November 1999, the voters of San Francisco adopted an ordinance which
prohibits financial institutions in San Francisco from imposing surcharges of
any kind to non-customers who access automated teller machines ("ATM") to
conduct electronic transactions, including cash withdrawals and fund transfers.
Other cities in California have either adopted or are considering similar
proposals. The Company estimates that approximately $230,000 of ATM network
revenue during 1999 was derived from such type of surcharges in the City and
County of San Francisco. While the implementation of this ordinance has been
delayed through legal challenges and this amount is not material, the successful
adoption of similar laws in other areas where the Company operates ATMs could
cause a more substantial reduction in ATM network revenue in the future.
A-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating Expenses
The following table sets forth the major components of operating expenses for
the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 45,460 $ 37,529 $ 32,879
Occupancy and equipment 14,626 10,901 9,382
Professional services and legal costs 2,795 2,979 3,077
Client service expenses 2,047 1,504 1,087
FDIC insurance and regulatory assessments 618 504 450
Expenses on other real estate owned 13 129 211
Other 14,865 13,999 12,110
----------------------------------------------
Total operating expenses excluding
nonrecurring items 80,424 67,545 59,196
Contribution to the GBB Foundation and related expenses 12,160 1,341 -
Mergers and other related nonrecurring costs 10,331 2,661 3,333
Recovery of legal settlement - - (1,700)
----------------------------------------------
Total operating expenses $ 102,915 $ 71,547 $ 60,829
==============================================
Efficiency ratio 59.92% 58.74% 59.98%
Efficiency ratio (before merger, nonrecurring
and extraordinary items) 51.15% 55.89% 59.04%
Total operating expenses to average assets 3.67% 3.38% 3.83%
Total operating expenses to average assets (before
merger, nonrecurring and extraordinary items) 2.87% 3.19% 3.73%
</TABLE>
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $102.9 million for 1999, compared to $71.5
million for 1998 and $60.8 million for 1997. The ratio of operating expenses to
average assets was 3.67% in 1999, 3.38% in 1998, and 3.83% in 1997. Total
operating expenses include merger and other related nonrecurring costs and
contributions to the Greater Bay Bancorp Foundation (the "Foundation") and
related expenses. Excluding these items, operating expense to average assets
would have been 2.87% in 1999, 3.19% in 1998 and 3.73% in 1997.
The efficiency ratio is computed by dividing total operating expenses by
net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio before merger,
nonrecurring and extraordinary items for 1999 was 51.15%, compared to 55.89% in
1998 and 59.04% in 1997.
During 1998, Greater Bay established the Foundation. The Foundation was
formed to provide a vehicle through which the Company, its officers and
directors can provide support to the communities in which the Company does
business. The Foundation focuses its support on initiatives related to
education, health and economic growth. To support the Foundation, the Company
contributed appreciated securities, which had an unrealized gain of $7.8 million
in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in
compensation and other expenses in connection with these appreciated securities.
The Company recorded expense of $12.2 million in 1999 and $1.3 million in 1998
which is included in operating expenses.
As indicated by the improvements in the efficiency ratio, the Company has
been able to achieve increasing economies of scale. In 1999, average assets
increased 32.6% from 1998, while operating expenses, excluding merger, and other
nonrecurring items, increased only 19.1%. From 1997 to 1998, average assets
increased 33.2%, while operating expenses, excluding merger and nonrecurring
costs increased only 14.1%.
Compensation and benefits expenses increased in 1999 to $45.5 million,
compared to $37.5 million in 1998 and $32.9 million in 1997. The increase in
compensation and benefits is due primarily to the additions in personnel made in
1999 and 1998 to accommodate the growth of the Company.
The increase in occupancy and equipment, client service expense, Federal
Deposit Insurance Corporation ("FDIC") insurance and regulatory assessments and
other operating expenses was related to the growth in the Company's loans,
deposits and trust assets.
Income Taxes
The Company's effective income tax rate for 1999 was 32.6%, compared to
35.2% in 1998 and 37.5% in 1997. The effective rates were lower than the
statutory rate of 42% due to the donation of appreciated securities to the
Foundation, state enterprise zone tax credits and tax-exempt income on municipal
securities. The reductions were partially offset by the impact of nondeductible
merger and other related nonrecurring costs. In 1998, the Company was able to
further reduce its effective tax rate through the recognition of certain net
operating losses acquired in its merger with PRB.
FINANCIAL CONDITION
Total assets increased 35.5% to $3.2 billion at December 31, 1999, compared
to $2.4 billion at December 31, 1998. Total assets increased 30.3% in 1998 from
$1.8 billion at December 31, 1997. The increases in 1999 and 1998 were primarily
due to increases in the Company's loan portfolio funded by growth in deposits.
A-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Loans
Total gross loans increased 43.5% to $2.1 billion at December 31, 1999,
compared to $1.5 billion at December 31, 1998. Total gross loans increased 31.7%
in 1998 from $1.1 billion at year-end 1997. The increases in loan volumes in
1999 and 1998 were primarily due to an improving economy in the Company's market
areas coupled with the business development efforts by the Company's
relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, a downturn in these sectors of the economy could adversely
impact the Company's borrowers. This could, in turn, reduce the demand for loans
and adversely impact the borrowers' abilities to repay their loans, while also
decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996
----------------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 845,422 40.5% $ 575,078 39.5% $ 464,397 42.1% $385,052 44.8%
Term real estate - commercial 595,499 28.6 435,387 30.0 310,207 28.1 237,383 27.6
----------------------------------------------------------------------------------------
Total commercial 1,440,921 69.1 1,010,465 69.5 774,604 70.2 622,435 72.4
Real estate construction and land 459,349 22.0 287,232 19.8 190,771 17.3 139,267 16.1
Real estate other 111,703 5.4 88,167 6.1 62,859 5.7 46,972 5.5
Consumer and other 128,120 6.1 105,135 7.2 104,941 9.5 73,188 8.5
----------------------------------------------------------------------------------------
Total loans, gross 2,140,093 102.6 1,490,999 102.6 1,133,175 102.7 881,862 102.5
Deferred fees and discounts, net (10,604) (0.5) (7,912) (0.5) (6,463) (0.6) (5,495) (0.6)
----------------------------------------------------------------------------------------
Total loans, net of deferred fees 2,129,489 102.1 1,483,087 102.1 1,126,712 102.1 876,367 101.9
Allowance for loan losses (44,147) (2.1) (29,831) (2.1) (23,563) (2.1) (16,308) (1.9)
----------------------------------------------------------------------------------------
Total loans, net $ 2,085,342 100.0% $1,453,256 100.0% $1,103,149 100.0% $860,059 100.0%
========================================================================================
<CAPTION>
-----------------
(Dollars in thousands) 1995
- --------------------------------------------------------------
Amount %
-----------------
<S> <C> <C>
Commercial $293,870 46.1%
Term real estate - commercial 166,793 26.1
-----------------
Total commercial 460,663 72.2
Real estate construction and land 84,720 13.3
Real estate other 51,262 8.0
Consumer and other 57,747 9.1
-----------------
Total loans, gross 654,392 102.6
Deferred fees and discounts, net (4,733) (0.7)
-----------------
Total loans, net of deferred fees 649,659 101.9
Allowance for loan losses (11,963) (1.9)
-----------------
Total loans, net $637,696 100.0%
=================
</TABLE>
A-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table presents the maturity distribution of the Company's (1)
commercial, (2) real estate construction and land, (3) term real estate -
commercial and (4) real estate other portfolios and the sensitivity of such
loans to changes in interest rates at December 31, 1999.
<TABLE>
<CAPTION>
Term Real estate
real estate- construction Real estate
(Dollars in thousands) Commercial commercial and land other
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans maturing in:
One year or less:
Fixed rate $172,076 $ 22,367 $ 22,192 $ 7,550
Variable rate 391,254 69,183 362,038 21,693
One to five years:
Fixed rate 57,480 25,265 1,644 1,893
Variable rate 141,366 74,442 48,193 28,188
After five years:
Fixed rate 25,683 219,441 3,722 9,318
Variable rate 57,563 184,801 21,560 43,061
------------------------------------------------------------
Total $845,422 $595,499 $459,349 $111,703
============================================================
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Banks have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $5,516 $3,226 $4,292 $ 6,452 $ 6,140
Accruing loans past due 90 days or more 51 - 158 1,748 957
Restructured loans 807 796 1,533 1,828 1,530
-------------------------------------------------------------------------------
Total nonperforming loans 6,374 4,022 5,983 10,028 8,627
Other real estate owned 271 966 1,541 2,224 3,660
-------------------------------------------------------------------------------
Total nonperforming assets $6,645 $4,988 $7,524 $12,252 $12,287
===============================================================================
Nonperforming assets to total loans
and other real estate owned 0.31% 0.34% 0.67% 1.39% 1.88%
Nonperforming assets to total assets 0.21% 0.21% 0.41% 0.87% 1.12%
</TABLE>
At December 31, 1999, the Company had $5.5 million in nonaccrual loans.
Interest income foregone on nonperforming loans totaled $418,000, $176,000 and
$590,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
A-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
December 31, 1999, OREO acquired through foreclosure had a carrying value of
$271,000 compared to $966,000 at December 31, 1998.
The Company had $807,000 and $796,000 of restructured loans as of December
31, 1999 and 1998, respectively. There were no principal reduction concessions
allowed on restructured loans during 1999 and 1998. Interest income from
restructured loans totaled $45,000 and $16,000 for the years ended December 31,
1999 and 1998. Foregone interest income, which totaled $0 and $11,000 for the
years ended December 31, 1999 and 1998, respectively, would have been recorded
as interest income if the loans had accrued interest in accordance with their
original terms prior to the restructurings.
The Company has three classifications for problem loans: "substandard",
"doubtful" and "loss". Substandard loans have one or more defined weakness and
are characterized by the distinct possibility that the Banks will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable; and there is a high possibility of loss of
some portion of the principal balance. A loan classified as "loss" is considered
uncollectible and its continuance as an asset is not warranted.
A-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the classified loans and other real estate
owned at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Substandard $ 28,679 $ 15,902 $ 18,661
Doubtful 1,850 1,376 2,153
Loss - - 49
Other real estate owned 271 966 1,541
---------------------------------------------
Classified loans and other real estate owned $ 30,800 $ 18,244 $ 22,404
=============================================
Classified loans and other real estate owned to
total loans and other real estate owned 1.45% 1.23% 1.99%
Allowance for loan losses to total classified 143.33% 163.51% 105.17%
</TABLE>
With the exception of these classified loans, management was not aware of any
loans outstanding as of December 31, 1999 where the known credit problems of the
borrower would cause management to have doubts as to the ability of such
borrowers to comply with their present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
that such an environment may have on the Company's loan portfolio. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual, become restructured loans, or other real estate
owned in the future.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio. The allowance is increased by provisions charged against current
earnings and reduced by net charge-offs. Loans are charged off when they are
deemed to be uncollectible; recoveries are generally recorded only when cash
payments are received.
A-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period end loans outstanding $2,140,093 $1,490,999 $1,131,674 $881,862 $654,392
Average loans outstanding $1,794,853 $1,234,914 $ 993,249 $744,893 $604,915
Allowance for loan losses:
Balance at beginning of period $ 29,831 $ 23,563 $ 16,308 $ 11,963 $ 11,282
Charge-offs:
Commercial (2,615) (1,651) (1,796) (984) (1,484)
Term real estate - commercial - (48) (54) (84) (25)
--------------------------------------------------------------------------------
Total commercial (2,615) (1,699) (1,850) (1,068) (1,509)
Real estate construction and land - (7) (243) (127) (410)
Real estate other - - - - (49)
Consumer and other (299) (230) (289) (298) (598)
--------------------------------------------------------------------------------
Total charge-offs (2,914) (1,936) (2,382) (1,493) (2,566)
--------------------------------------------------------------------------------
Recoveries:
Commercial 1,016 486 220 468 738
Term real estate - commercial - 11 1 27 -
--------------------------------------------------------------------------------
Total commercial 1,016 497 221 495 738
Real estate construction and land 4 - 6 328 19
Real estate other 56 - - - -
Consumer and other 345 65 68 105 194
--------------------------------------------------------------------------------
Total recoveries 1,421 562 295 928 951
--------------------------------------------------------------------------------
Net charge-offs (1,493) (1,374) (2,087) (565) (1,615)
Provision charged to income\\(1)\\ 15,809 7,642 9,342 4,910 2,296
--------------------------------------------------------------------------------
Balance at end of period $ 44,147 $ 29,831 $ 23,563 $ 16,308 $ 11,963
================================================================================
Net charge-offs to average loans outstanding
during the period 0.08% 0.11% 0.21% 0.08% 0.27%
Allowance as a percentage of average loans
outstanding 2.46% 2.42% 2.37% 2.19% 1.98%
Allowance as a percentage of period end
loans outstanding 2.07% 2.01% 2.09% 1.86% 1.84%
Allowance as a percentage of
non-performing loans 692.61% 741.70% 393.83% 162.62% 138.67%
</TABLE>
(1) Includes $2.7 million, $183,000, $1.4 million and $800,000 in 1999, 1998,
1997 and 1996, respectively, to con form to the Companys' allowance methodology.
These amounts are included in mergers and related nonrecurring costs.
The Company employs a systematic methodology for determining its allowance
for loan losses, which includes a monthly review process and monthly adjustment
of the allowance. The Company's process includes a periodic loan by loan review
for loans that are individually evaluated for impairment as well as detailed
reviews of other loans (either individually or in pools). This includes an
assessment of known problem loans, potential problem loans, and other loans that
exhibit indicators of deterioration.
The Company's methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan losses
that management believes is appropriate at each reporting date. Quantitative
factors include the Company's historical loss experience, delinquency and
charge-off trends, collateral values, changes in non-performing loans, and other
factors. Quantitative factors also incorporate known information about
individual loans including borrowers' sensitivity to interest rate movements and
borrowers' sensitivity to quantifiable external factors including commodity and
finished goods prices as well as acts of nature (earthquakes, fires, etc.) that
occur in a particular period.
Qualitative factors include the general economic environment in the
Company's marketplace, and in particular, the state of the technology industries
based in the Silicon Valley and other key industries in the San Francisco Bay
Area. Size and complexity of individual credits in relation to lending officers'
background and experience levels, loan structure, extent and nature of waivers
of existing loan policies and pace of portfolio growth are other qualitative
factors that are considered in the Company's methodology.
A-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's methodology is, and has been consistently followed. However,
as the Company adds new products, increases in complexity, and expands its
geographic coverage, the Company will enhance its methodology to keep pace with
the size and complexity of the loan portfolio. In this regard, the Company has
periodically engaged outside firms to independently assess the Company's
methodology, and on an ongoing basis the Company engages outside firms to
perform independent credit reviews of its loan portfolio. Management believes
that the Company's systematic methodology continues to be appropriate given the
Company's size and level of complexity.
While this methodology utilizes historical and other objective information,
the establishment of the allowance for loan losses and the classification of
loans, is to some extent, based on the judgment and experience of management. In
general, management feels that the allowance for loan losses is adequate as of
December 31, 1999. However, future changes in circumstances, economic conditions
or other factors could cause management to increase or decrease the allowance
for loan losses as necessary.
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocation presented should not be interpreted as an indication that charges to
the allowance for loan losses will be incurred in these amounts or proportions,
or that the portion of the allowance allocated to each loan category represents
the total amounts available for charge-offs that may occur within these
categories. The unallocated portion of the allowance for loan losses and the
total allowance is applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------
% of Category % of Category % of Category
to Gross to Gross to Gross
(Dollars in thousands) Amount Loans Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $15,328 39.50% $11,330 38.57% $ 8,479 40.98%
Term real estate - commercial 7,589 28.72 3,601 29.20 2,794 28.35
-----------------------------------------------------------------------------
Total Commercial 22,917 68.22 14,931 67.77 11,273 69.33
Real estate construction and land 4,377 21.46 3,289 19.27 2,060 16.84
Real estate term 990 4.33 683 5.91 531 4.57
Consumer and other 3,273 5.99 2,198 7.05 1,411 9.26
-----------------------------------------------------------------------------
Total allocated 31,557 21,101 15,275
Unallocated 12,590 8,730 8,288
-----------------------------------------------------------------------------
Total $44,147 100.00% $29,831 100.00% $23,563 100.00%
=============================================================================
<CAPTION>
1996 1995
-------------------------------------------
% of Category % of Category
to Gross to Gross
(Dollars in thousands) Amount Loans Amount Loans
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 6,625 43.66% $ 4,793 44.91%
Term real estate - commercial 2,053 26.92 1,709 25.49
------------------------------------------
Total Commercial 8,678 70.58 6,502 70.40
Real estate construction and land 2,193 15.79 1,446 12.95
Real estate term 551 5.33 670 7.83
Consumer and other 1,704 8.30 1,136 8.82
------------------------------------------
Total allocated 13,126 9,754
Unallocated 3,182 2,209
------------------------------------------
Total $16,308 100.00% $11,963 100.00%
==========================================
</TABLE>
At December 31, 1999, the allowance for loan losses was $44.1 million,
consisting of a $31.6 million allocated allowance and a $12.6 million
unallocated allowance. The unallocated allowance recognizes the model and
estimation risk associated with the allocated allowances, and management's
evaluation of various conditions, the effects of which are not directly measured
in determining the allocated allowance. The evaluation of the inherent loss
regarding these conditions involves a higher degree of uncertainty because they
are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following at the balance sheet date:
. The strength and duration of the current business cycle and existing general
economic and business conditions affecting our key lending areas; economic and
business conditions affecting our key lending portfolios;
. Seasoning of the loan portfolio, growth in loan volumes and changes in loan
terms; and
. The results of bank regulatory examinations.
A-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Investment Securities
The Company's investment portfolio is managed to meet the Company's
liquidity needs through proceeds from scheduled maturities and is utilized for
pledging requirements for deposits of state and political subdivisions and
securities sold under repurchase agreements. The portfolio is comprised of U.S.
Treasury securities, U.S. government agency securities, mortgage-backed
securities, obligations of states and political subdivisions and a modest amount
of equity securities, including Federal Reserve Bank stock and Federal Home Loan
Bank stock. The Company does not include Federal Funds sold and certain other
short-term securities as investment securities. These other investments are
included in cash and cash equivalents. Investment securities classified as
available for sale are recorded at fair value, while investment securities
classified as held to maturity are recorded at cost. Unrealized gains or losses,
net of the deferred tax effect, are reported as increases or decreases in
shareholders' equity for available for sale securities.
The amortized cost and estimated fair value of investment securities at
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1999 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 19,087 $ - $ (249) $ 18,838
U.S. agency notes 28,848 7 (886) 27,969
Mortgage-backed securities 247,223 96 (8,053) 239,264
Tax-exempt securities 55,690 82 (3,395) 52,379
Corporate securities 115,819 - (11,979) 103,840
---------------------------------------------
Total securities available for sale 466,667 185 (24,562) 442,290
---------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - 500
U.S. agency notes 29,482 - (667) 28,815
Mortgage-backed securities 59,524 28 (2,018) 57,534
Tax-exempt securities 52,219 123 (2,710) 49,632
---------------------------------------------
Total securities held to maturity 141,725 151 (5,395) 136,481
---------------------------------------------
Other securities 15,775 8,143 - 23,918
---------------------------------------------
Total investment securities $624,167 $8,479 $(29,957) $602,689
=============================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1998 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 24,665 $ 82 $ (27) $ 24,720
U.S. agency notes 48,213 47 (8) 48,252
Mortgage-backed securities 222,359 1,793 (147) 224,005
Tax-exempt securities 52,581 1,006 - 53,587
Corporate securities 69,774 110 (1,121) 68,763
--------------------------------------------------------------
Total securities available for sale 417,592 3,038 (1,303) 419,327
--------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,764 2 (2) 1,764
U.S. agency notes 28,495 22 (58) 28,459
Mortgage-backed securities 37,967 174 (207) 37,934
Tax-exempt securities 33,882 1,004 (15) 34,871
--------------------------------------------------------------
Total securities held to maturity 102,108 1,202 (282) 103,028
--------------------------------------------------------------
Other securities 8,090 - - 8,090
--------------------------------------------------------------
Total investment securities $527,790 $4,240 $ (1,585) $530,445
==============================================================
</TABLE>
A-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The declines in fair value of the Company's investment portfolio are a
result of the increase in overall interest rates which occurred throughout 1999.
The maturities of investment securities at December 31, 1999 and 1998 are
as follows. Other securities are comprised of equity investments and have no
stated maturity and therefore are excluded from this table.
<TABLE>
<CAPTION>
2001 2005
Through Through 2010 and
(Dollars in thousands) 2000 2004 2009 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 5,125 $13,962 $ - $ - $ 19,087
U.S. agency notes (1) 1,254 17,812 9,782 - 28,848
Mortgage-backed securities (2) 1,268 6,882 6,993 232,080 247,223
Tax-exempt securities 891 7,775 8,933 38,091 55,690
Corporate securities 996 - - 114,823 115,819
----------------------------------------------------------------------------------
Total securities available for sale 9,534 46,431 25,708 384,994 466,667
----------------------------------------------------------------------------------
Fair value $ 9,483 $46,365 $24,966 $361,476 $442,290
----------------------------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - - 500
U.S. agency notes (1) 2,000 23,993 3,490 - 29,483
Mortgage-backed securities (2) 75 2,082 9,082 48,285 59,524
Tax-exempt securities 996 3,130 11,670 36,422 52,218
----------------------------------------------------------------------------------
Total securities held to maturity 3,571 29,205 24,242 84,707 141,725
----------------------------------------------------------------------------------
Fair value 3,564 28,616 24,024 80,277 136,481
----------------------------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $13,105 $75,636 $49,950 $469,701 $608,392
----------------------------------------------------------------------------------
Total fair value $13,047 $74,981 $48,990 $441,753 $578,771
----------------------------------------------------------------------------------
Weighted average yield-total portfolio 5.55% 5.95% 6.59% 7.19% 6.87%
</TABLE>
(1) Certain notes issued by U.S. Agencies may be called, without penalty, at
the discretion of the issuer. This may cause the actual maturities to
differ significantly from the contractual maturity dates.
(2) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
For additional information concerning the investments portfolio, see
Note 3 of Notes to Consolidated Financial Statements.
Deposits
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $2.8
billion at December 31, 1999, an increase of 37.7% compared to deposits of $2.0
billion at December 31, 1998. In 1998, deposits increased 29.4% from $1.6
billion at December 31, 1997. The increase in deposits was primarily due to the
continued marketing efforts directed at commercial business clients in the
Company's market areas, coupled with an increase in deposits related to the new
business development activities of the Greater Bay Trust Company and the Venture
Banking Group.
A-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
PBC held deposits from a single customer (the "Special Deposit") of $111.1
million and $89.6 million at December 31, 1999 and 1998, respectively. The
Special Deposit represents the proposed settlement of a class action lawsuit not
involving the Company. Due to the uncertainty of the time the Special Deposit
will remain with PBC, management has invested a significant portion of the
proceeds from this deposit in agency securities with maturities of less than 90
days. As previously discussed, the interest rate spread on the Special Deposit
was approximately 3.10% and 2.25% for December 31, 1999 and 1998, which resulted
in a decrease in overall interest rate spreads.
The Company's noninterest-bearing demand deposit accounts increased 31.3%
to $598.4 million at December 31, 1999, compared to $455.7 million a year
earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $1.6 billion at year-end 1999, an
increase of 37.7% from $1.2 billion at December 31, 1998. MMDA, NOW and
savings accounts were 58.0% of total deposits at December 31, 1999, as compared
to 57.98% at December 31, 1998.
Time certificates of deposit totaled $580.4 million, or 20.7% of total
deposits, at December 31, 1999, compared to $401.1 million, or 19.7% of total
deposits, at December 31, 1998. Note 7 of the Notes to the Consolidated
Financial Statements presents the maturity distribution of time certificates of
deposits at December 31, 1999.
As of December 31, 1999, the Company had $19.3 million in brokered deposits
outstanding. There were no such deposits as of December 31, 1998.
For additional information concerning deposits, see Note 7 of Notes to
Consolidated Financial Statements.
Other Borrowings
At December 31, 1999 other borrowings consisted of Federal Funds purchased
and securities sold under agreements to repurchase, Federal Home Loan Bank
advances, and advances under credit lines. Note 9 of the Notes to the
Consolidated Financial Statements provides the amounts outstanding, the short
and long term classification, other borrowings outstanding during the year and
the general terms of these borrowings.
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and liabilities
to meet the return on investment expectations of its shareholders. The Company
monitors the sources and uses of funds on a daily basis to maintain an
acceptable liquidity position. In addition to liquidity from core deposits and
repayments and maturities of loans and investments, the Banks utilize brokered
deposit lines, sells securities under agreements to repurchase and borrows
overnight Federal Funds.
A-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are obtained
from management fees, interest received on its investments and dividends
declared and paid by the Banks. There are statutory and regulatory provisions
that could limit the ability of the Banks to pay dividends to Greater Bay. At
December 31, 1999, the Banks had approximately $65.5 million in the aggregate
available to be paid as dividends to Greater Bay. Management of Greater Bay
believes that such restrictions will not have an impact on the ability of
Greater Bay to meet its ongoing cash obligations. As of December 31, 1999,
Greater Bay did not have any material commitments for capital expenditures.
Net cash provided by operating activities, consisting primarily of net
income, totaled $49.0 million for 1999, $29.6 million for 1998 and $22.7 million
for 1997. Cash used for investing activities totaled $758.9 million in 1999,
$562.5 million in 1998 and $357.2 million in 1997. The funds used for investing
activities primarily represent increases in loans and investment securities for
each year reported.
For the year ended December 31, 1999, net cash provided by financing
activities was $790.2 million, compared to $516.4 million in 1998 and $383.2
million in 1997. Historically, the primary financing activity of the Company has
been through deposits. In 1999, 1998 and 1997, deposit gathering activities
generated cash of $767.9 million, $463.3 million and $342.6 million,
respectively. This represents a total of 97.2%, 89.7% and 89.4% of the
financing cash flows for 1999, 1998 and 1997, respectively. The 1999 increase
in financing activities other than deposits are a result of proceeds from the
sale of stock of $26.1 million, the Company entering into $70.0 million in
long-term low cost repurchase agreements in 1998, and the issuance of TPS of
$30.0 million and $20.0 million in 1998 and 1997, respectively, which were
issued principally to provide capital to the Company (see Capital
Resources - below).
Capital Resources
Shareholders' equity at December 31, 1999 increased to $206.6 million from
$159.0 million at December 31, 1998 and from $135.4 million at December 31,
1997. Greater Bay paid dividends of $0.48, $0.38 and $0.30 per share in
December 31, 1999, 1998 and 1997, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
In 1999 the Company issued 535,000 shares of common stock in a private
placement. The proceeds from the offering were $19.0 million, net of issuance
costs. Greater Bay intends to use the net proceeds from the offering for general
corporate purposes.
In 1997, the Company issued $20.0 million in TPS to enhance its regulatory
capital base, while also providing added liquidity. In 1998, the Company
completed a second offering of TPS in an aggregate amount of $30.0 million.
Under applicable regulatory guidelines, the TPS qualifies as Tier I capital up
to a maximum of 25% of Tier I capital. Any additional portion of TPS would
qualify as Tier 2 capital. As of December 31, 1999, all outstanding TPS
qualified as Tier I capital. As the Company's shareholders' equity increases,
the amount of Tier I capital that can be comprised of TPS will increase.
The Company is committed to remaining well-capitalized as defined by
regulatory guidelines. If deposit and loan growth continues at current levels,
it is anticipated the Company will need to raise additional capital to remain
well-capitalized in 2000. The Company is evaluating an additional issuance of
TPS as well as other alternatives to meet this anticipated increase in required
capital. We anticipate that we will be able to leverage any further issuance of
TPS and therefore we do not anticipate that the raising of additional TPS would
be dilutive to future net income per share. However, the impact of raising any
additional capital on net income per share will depend on the type of capital
raised, the terms of the capital, the time period required to invest the capital
funds into earning-assets and the type of assets funded.
A-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
A banking organization's total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill. Supplementary capital includes
the allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities, certain other capital instruments
and term subordinated debt. The Company's major capital components are
shareholders' equity and TPS in core capital, and the allowance for loan losses
and subordinated debt in supplementary capital.
At December 31, 1999, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter. The minimum leverage
ratio is 3.0%, although certain banking organizations are expected to exceed
that amount by 1.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at December 31,
1999 and the two highest levels recognized under these regulations are as
follows:
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
------------------------------------------------------------------
Company 8.02% 9.56% 10.95%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
The Company's leverage ratio was 8.02% at December 31, 1999, compared
to 8.24% at December 31, 1998. At December 31, 1999, the Company's risk-based
capital ratios were 9.56% for Tier 1 risk-based capital and 10.95% for total
risk-based capital, compared to 10.34% and 12.38%, respectively, as of December
31, 1998.
In addition, at December 31, 1999, each of the Banks, with the
exception of MDNB, had levels of capital that exceeded the well-capitalized
guidelines. For additional information on the capital levels and capital ratios
of the Company and each of the Banks, see Note 17 of Notes to Consolidated
Financial Statements.
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Quantitative and Qualitative Disclosures about Market Risk
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and its allowance for
loan losses see "--Allowance for Loan Losses" herein.
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee "ALCO" which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in net portfolio values and net interest income under various interest
rate scenarios. The ALCO attempts to manage the various components of the
Company's balance sheet to minimize the impact of sudden and sustained changes
in interest rates on net portfolio value and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in net portfolio value in the event of hypothetical changes in
interest rates and interest liabilities. If potential changes to net portfolio
value and net interest income resulting from hypothetical interest rate swings
are not within the limits established by the Board, the Board may direct
management to adjust its asset and liability mix to bring interest rate risk
within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused its
investment activities on securities with generally medium-term (8 years to 12
years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of its
liabilities. In addition, the Company has utilized an interest rate swap to
manage the interest rate risk of the TPS II securities. This interest rate swap
is not an "ineffective hedge" and is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in net portfolio value of its
cash flows from assets, liabilities and off-balance sheet items in the event of
a range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market rate
sensitive instruments in the event of sudden and sustained increases and
decreases in market interest rates of 100 basis points. The following table
presents the Company's projected change in net portfolio value for these rate
shock levels as of December 31, 1999. All market rate sensitive instruments
presented in this table are classified as either held to maturity or available
for sale. The Company has no trading securities.
Change in
Interest Rates Net Portfolio Projected Change
---------------------------
(Dollars in thousands) (1) Value Dollars Percentage
- --------------------------------------------------------------------------
100 basis point rise $365,830 $ 7,770 2.2%
Base scenario 358,020 - 0.0%
100 basis point decline 350,469 (7,591) -2.1%
(1) Evaluation excludes MDNB and Coast Bancorp. See further discussion below.
The preceding table indicates that at December 31, 1999, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to decrease. However, the foregoing
analysis does not attribute additional value to the Company's noninterest-
bearing deposit balances, which have a significantly higher market value during
periods of increasing interest rates.
A-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net portfolio value is calculated based on the net present value of
estimated cash flows utilizing market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of net portfolio value. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of the net portfolio value. Certain assets, such as adjustable-rate
loans, which represent one of the Company's loan products, have features which
restrict changes in interest rate on a short-term basis and over the life of the
assets. In addition, the proportion of adjustable-rate loans in the Company's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the net portfolio value.
Finally, the ability of many borrowers to repay their adjustable-rate mortgage
loans may decrease in the event of significant interest rate increases.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and liabilities
and their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both assets
and liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: one day or immediate, two days to
six months, seven to twelve months, one to three years, four to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps.
The following table shows interest sensitivity gaps for different intervals
as of December 31, 1999:
<TABLE>
<CAPTION>
Immediate 2 Days To 7 Months to 1 Year 4 Years More than Total Rate
(Dollars in thousands) or One Day 6 Months 12 Months to 3 Years to 5 Years 5 Years Sensitive
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 794 $ - $ - $ - $ - $ - $ 794
Short term investments 245,807 - - - - - 245,807
Investment securities - 80,544 34,422 143,952 57,872 267,224 584,014
Other securities - - - - - - -
Loans 1,194,733 515,447 40,250 136,089 111,276 141,042 2,138,837
Loan losses/unearned fees - - - - - - -
Other assets - - - - - - -
---------------------------------------------------------------------------------------------
Total assets $1,441,334 $ 595,991 $ 74,672 $280,041 $169,148 $408,266 $2,969,452
---------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Deposits $1,649,302 $ 437,472 $ 96,037 $ 23,557 $ 2,168 $ 35 $2,208,571
Other borrowings - 63,600 - - 37,000 - 100,600
Other liabilities - - - - - - -
Trust preferred securities - - - - - 50,000 50,000
Shareholders' equity - - - - - - -
---------------------------------------------------------------------------------------------
Total liabilities and equity $1,649,302 $ 501,072 $ 96,037 $ 23,557 $ 39,168 $ 50,035 $2,359,171
---------------------------------------------------------------------------------------------
Gap $ (207,968) $ 94,919 $ (21,365) $256,484 $129,980 $358,231 $ 610,281
Cumulative Gap $ (207,968) $(113,049) $(134,414) $122,070 $252,050 $610,281 $ 610,281
Cumulative Gap/total assets -6.47% -3.47% -4.18% 3.80% 7.84% 18.98% 18.98%
<CAPTION>
Total
Non-Rate
(Dollars in thousands) Sensitive Total
- ----------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 125,092 $ 125,886
Short term investments - 245,807
Investment securities - 584,014
Other securities 23,918 23,918
Loans 1,098 2,139,935
Loan losses/unearned fees (54,592) (54,592)
Other assets 151,128 151,128
-------------------------
Total assets $ 246,644 $3,216,096
-------------------------
LIABILITIES AND EQUITY
Deposits $ 598,428 $2,806,999
Other borrowings - 100,600
Other liabilities 51,863 51,863
Trust preferred securities - 50,000
Shareholders' equity 206,634 206,634
-------------------------
Total liabilities and equity $ 856,925 $3,216,096
-------------------------
Gap $(610,281) -
Cumulative Gap $ - -
Cumulative Gap/total assets - -
</TABLE>
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The foregoing table indicates that the Company had a one year gap of
$(163.9) million, or (5.10)% of total assets, at December 31, 1999. In theory,
this would indicate that at December 31, 1999, $163.9 million more in
liabilities than assets would reprice if there were a change in interest rates
over the next 365 days. Thus, if interest rates were to increase, the gap would
tend to result in a lower net interest margin. However, changes in the mix of
earning assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread between an asset and its supporting liability can vary
significantly while the timing of repricing of both the asset and its supporting
liability can remain the same, thus impacting net interest income. This
characteristic is referred to as a basis risk and, generally, relates to the
repricing characteristics of short-term funding sources such as certificates of
deposit.
The impact of fluctuations in interest rates on the Company's projected
next twelve month net interest income and net income has been evaluated through
an interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of December 31, 1999, the analysis indicates that the Company's
net interest income would increase a maximum of 14.1% (excluding MDNB and CCB)
if rates rose 200 basis points immediately and would decrease a maximum of
13.6%, (excluding MDNB and CCB) if rates declined 200 basis points immediately.
In addition, the results indicate that notwithstanding the Company's gap
position, which would indicate that the net interest margin increases when rates
rise, the Company's net interest margin increases during rising rate periods due
to the basis risk imbedded in the Company's interest-bearing liabilities.
In addition, while this analysis indicates the probable impact of
interest rate movements on the Company's net interest income, it does not take
into consideration other factors that would impact this analysis. These factors
would include management's and ALCO's actions to mitigate the impact to the
Company and the impact of the Company's credit risk profile during periods of
significant interest rate movements.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
The above quantified evaluations exclude the impact of MDNB and CCB
because that institution had not been converted to risk management system as to
net portfolio value and interest rate shock simulation analysis at December 31,
1999. The Company has performed a preliminary analysis of MDNB's and CCB's risk
profile and has determined that MDNB's and CCB's exposure to interest rate risk
is equal to or lower than that of the Company as a whole.
Year 2000 State of Readiness
The Company's mission critical systems successfully responded to the
century date change. Accordingly, the Company's core banking systems, including
the application software for its deposit, loan and trust computer systems, as
well as the electronic funds transfers system with the Federal Reserve, were
fully operational and accurately processing customer information and
transactions. The Company will continue to monitor its systems and those of its
major vendors, suppliers and clients over the coming months.
A-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Recent Events
On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the
former holding company of MDNB, merged with and into Greater Bay. Upon
consummation of the merger, the outstanding shares of MD Bancshares were
converted into an aggregate of 1,395,499 shares of Greater Bay's stock. The
stock was issued to MD Bancshares' shareholders in a tax-free exchange. The
transaction was accounted for as a pooling-of-interests. The financial
information presented herein has been restated to reflect the merger with MD
Bancshares on a pooling-of-interests basis. As of December 31, 1999, MD
Bancshares had $221.1 million in assets, $205.5 million in deposits and $12.8
million in shareholders' equity. MDNB has offices located in Danville,
Pleasanton and Lafayette, California.
On May 18, 2000, Greater Bay and Coast Bancorp, the former holding
company of CCB, was merged with and into Greater Bay. Upon consummation of the
merger, the outstanding shares of Coast Bancorp were converted into an aggregate
of approximately 3,070,000 shares of Greater Bay's stock. The stock was issued
to Coast Bancorp's shareholders in a tax-free exchange. The transaction was
accounted for as a pooling-of-interests. The financial information presented
herein has been restated to reflect the merger with Coast Bancorp on a pooling-
of-interests basis. As of December 31, 1999, Coast Bancorp had $370.0 million
in assets, $300.6 million in deposits and $33.0 million in shareholders'
equity. CCB's offices are located in Aptos, Capitola, Santa Cruz, Scotts
Valley and Watsonville, California.
On January 26, 2000, the Company, Bank of Santa Clara ("BSC") and GBB
Merger Corp. signed a definitive agreement for a merger between BSC and GBB
Merger Corp., as a result of which BSC will become a wholly owned subsidiary of
Greater Bay. The agreement provides for BSC shareholders to receive
approximately 2,017,000 shares of Greater Bay stock subject to certain
adjustments based on movements in Greater Bay's stock price in a tax-free
exchange to be accounted for as a pooling-of-interests. The transaction is
expected to be completed in the second quarter of 2000 subject to regulatory and
shareholder approvals. As of December 31, 1999, BSC had $326.9 million in
assets, $293.7 million in deposits and $31.4 million in shareholders' equity.
BSC has offices in Milpitas, San Jose, Santa Clara and Sunnyvale, California.
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS
Corp. signed a definitive agreement for a merger between BOP and DKSS, as a
result of which BOP will become a wholly owned subsidiary of Greater Bay. The
agreement provides for BOP shareholders to receive approximately 990,000 shares
of Greater Bay stock subject to certain adjustments based on movements in the
Company's stock price in a tax-free exchange to be accounted for as a pooling-
of-interests. The transaction is expected to be completed in the fourth quarter
of 2000 subject to BOP's shareholders and regulatory approvals. As of and for
the year ended December 31, 1999, BOP had $8.6 million in net interest income,
$2.3 million in net income, $194.7 million in assets, $162.2 million in
deposits and $14.9 million in shareholder's equity.
Assuming the acquisitions of MD Bancshares, Coast Bancorp and BSC had
been completed at December 31, 1999, Greater Bay would have had proforma assets
of $3.5 billion, deposits of $3.1 billion and $238.0 million of shareholders'
equity on a pooled basis.
Recent Accounting Developments
In April 1999, the Financial Accounting Standards Board ("FASB") reached
tentative conclusions on the future of the pooling-of-interests method of
accounting for business combinations. These tentative decisions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method. The FASB agreed that the
purchase method should be applied prospectively to business combination
transactions that are initiated after the final standard is issued. The FASB has
issued an exposure draft during the third quarter of 1999 and expects a final
standard will be issued and become effective in the fourth quarter of 2000. A
portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels. A
change in the accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
A-25
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
----------------------------
(Dollars in thousands) 1999* 1998*
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 125,886 $ 112,843
Federal funds sold 215,550 100,200
Other short term securities 30,257 78,326
----------------------------
Cash and cash equivalents 371,693 291,369
Investment securities:
Available for sale, at fair value 442,290 419,327
Held to maturity, at amortized cost (fair value
1999: $136,481 1998: $103,028) 141,725 102,108
Other securities 23,918 8,090
----------------------------
Investment securities 607,933 529,525
Total loans:
Commercial 845,422 575,078
Term real estate - commercial 595,499 435,387
----------------------------
Total commercial 1,440,921 1,010,465
Real estate construction and land 459,349 287,232
Real estate other 111,703 88,167
Consumer and other 128,120 105,135
Deferred loan fees and discounts (10,604) (7,912)
----------------------------
Total loans, net of deferred fees 2,129,489 1,483,087
Allowance for loan losses (44,147) (29,831)
----------------------------
Total loans, net
2,085,342 1,453,256
Property, premises and equipment 25,872 20,582
Interest receivable and other assets 125,256 79,233
----------------------------
Total assets $ 3,216,096 $ 2,373,965
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 2,806,999 $ 2,039,117
Other borrowings 100,600 93,845
Subordinated debt - 3,000
Other liabilities 51,863 28,980
----------------------------
Total liabilities 2,959,462 2,164,942
----------------------------
Company obligated mandatorily redeemable cumulative trust
preferred securities of subsidiary trusts holding solely
junior subordinated debentures 50,000 50,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued - -
Common stock, no par value: 24,000,000 shares authorized;
17,019,474 and 15,923,322 shares issued and outstanding as of
December 31, 1999 and 1998, respectively 122,152 95,707
Accumulated other comprehensive income (loss) (8,055) 349
Retained earnings 92,537 62,967
----------------------------
Total shareholders' equity 206,634 159,023
----------------------------
Total liabilities and shareholders' equity $ 3,216,096 $ 2,373,965
============================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-26
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
(Dollars in thousands, except per share amounts) 1999* 1988* 1997*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $169,286 $128,252 $105,652
Interest on investment securities:
Taxable 30,033 25,325 15,391
Tax - exempt 4,655 3,263 1,689
------------------------------------------
Total interest on investment securities 217,599 170,032 17,080
Other interest income 13,625 13,192 11,536
------------------------------------------
Total interest income 217,599 170,032 134,268
------------------------------------------
INTEREST EXPENSE
Interest on deposits 74,227 56,152 43,096
Interest on long term borrowings 8,809 7,926 3,677
Interest on other borrowings 794 1,503 1,379
------------------------------------------
Total interest expense 83,830 65,581 48,152
------------------------------------------
Net interest income 133,769 104,451 86,116
Provision for loan losses 13,064 7,459 7,991
------------------------------------------
Net interest income after provision for loan losses 120,705 96,992 78,125
------------------------------------------
OTHER INCOME
Service charges and other fees 5,193 4,263 4,252
Trust fees 2,990 2,473 2,049
Loan and international banking fees 2,833 1,303 1,404
ATM network revenue 2,682 2,440 2,607
Gain on sale of SBA loans 2,029 3,488 2,189
Gain (loss) on investments, net 33 395 (18)
Warrant income, net 14,508 945 1,162
Other income 7,708 2,050 1,661
------------------------------------------
Total 37,976 17,357 15,306
------------------------------------------
OPERATING EXPENSES
Compensation and benefits 45,460 37,529 32,879
Occupancy and equipment 14,626 10,901 9,382
Contribution to the GBB Foundation and related expenses, net 12,160 1,341 -
Merger and other related nonrecurring costs 10,331 2,661 3,333
Recovery of legal settlement - - (1,700)
Other expenses 20,338 19,115 16,935
------------------------------------------
Total operating expenses 102,915 71,547 60,829
------------------------------------------
Net income before provision for income taxes and
extraordinary items 55,766 42,802 32,602
Provision for income taxes 18,201 15,087 12,248
------------------------------------------
Net income before extraordinary items 37,565 27,715 20,354
Extraordinary items
(88) - -
------------------------------------------
Net income $ 37,477 $ 27,715 $ 20,354
==========================================
Net income per share - basic** $ 2.29 $ 1.75 $ 1.34
==========================================
Net income per share - diluted** $ 2.17 $ 1.63 $ 1.25
==========================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split declared for shareholders of record at
April 30, 1998.
See notes to supplemental consolidated financial statements.
A-27
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
(Dollars in thousands) 1999* 1998* 1997*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 37,477 $ 27,715 $ 20,354
--------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (net of taxes
of $(13,278), $(85), and $627 for the years ended December 31,
1999, 1998 and 1997, respectively) (18,989) (121) 896
Less: reclassification adjustment for gains (losses) included in
net income (net of taxes of $6,085, $158 and $(7) for the
years ended December 31, 1999, 1998, and 1997, respectively 8,404 237 (11)
--------------------------------------
Net change (10,585) 116 885
Cash flow hedge:
Cummulative transition effect of adopting SFAS No. 133
(net of taxes of $(744) as of October 1, 1998 - (1,063) -
Change in market value of hedge during the period
(net of taxes of $1,092 and $294 for the years ended December 31,
1999 and 1998, respectively) 2,325 418 -
Less: reclassification adjustment for swap settlements
in net income (net of taxes of $(80) and $(23) for the years ended
December 31, 1999 and 1998, respectively) (144) (32) -
--------------------------------------
Net change 2,181 (677) -
Other comprehensive income (loss) (8,404) (561) 885
--------------------------------------
Comprehensive income $ 29,073 $ 27,154 $ 21,239
======================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-28
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Other Total
For the years ended December 31, 1999, 1998 and 1997 Common Stock Comprehensive Retained Shareholders'
-----------------------
(Dollars in thousands, except per share amounts) Shares** Amount Income (Loss) Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Greater Bay Bancorp, prior to pooling 6,477,774 $ 34,884 $ 71 $ 9,727 $ 44,682
Shares issued to Peninsula Bank of Commerce
shareholders 1,295,216 7,141 - - 7,141
Peninsula Bank of Commerce retained earnings prior to
pooling - - (53) 6,186 6,133
Shares issued to Pacific Rim Bancorporation
shareholders 950,748 8,000 - - 8,000
Pacific Rim Bancorporation retained earnings prior to
pooling - - (108) 879 771
Shares issued to Pacific Business Funding Corporation
shareholders 298,000 51 - - 51
Pacific Business Funding Corporation retained
earnings prior to pooling - - - 59 59
Shares issued to Bay Area Bancorp shareholders 1,164,427 4,143 - - 4,143
Bay Area Bancorp retained earnings prior to pooling - - (5) 5,143 5,138
Shares issued to Bay Commercial Services shareholders 735,723 3,662 - - 3,662
Bay Commercial Services retained earnings prior to - - (15) 5,771 5,756
pooling
Shares issued to Mt. Diablo Bancshares shareholders 857,871 5,939 - - 5,939
Mt. Diablo Bancshares retained earnings prior to - - 5 (403) (398)
pooling
Shares issued to Coast Bancorp shareholders 2,800,964 11,041 - - 11,041
Coast Bancorp retained earnings prior to pooling - - 130 12,022 12,152
------------------------------------------------------------------
Balance, December 31, 1996, restated to reflect 14,580,723 74,861 25 39,384 114,270
pooling
Net income - - - 20,354 20,354
Other comprehensive income, net of taxes - - 885 - 885
Stock offering by Mt. Diablo Bancshares 285,960 2,555 - - 2,555
Stock options exercised, including related tax benefit 422,602 2,744 - - 2,744
Stock issued in Employee Stock Purchase Plan 30,332 347 - - 347
401(k) employee stock purchase 36,152 531 - - 531
Stock repurchase by Bay Area Bancshares and Coast (7,612) (119) - (100) (219)
Bancorp
Pacific Business Funding Corporation distribution - - - (208) (208)
Cash dividend $0.38 per share*** - - - (5,888) (5,888)
------------------------------------------------------------------
Balance, December 31, 1997* 15,348,157 80,919 910 53,542 135,371
Net income - - - 27,715 27,715
Other comprehensive loss, net of taxes - - (561) - (561)
Stock options exercised, including related tax benefit 316,683 4,445 - - 4,445
Stock issued in Employee Stock Purchase Plan 29,670 656 - - 656
401(k) employee stock purchase 36,483 1,060 - - 1,060
Stock repurchase by Bay Area Bancshares and Coast (84,984) (604) - (2,190) (2,794)
Bancorp
Pacific Business Funding Corporation distribution - - - (1,163) (1,163)
Stock dividend by Coast Bancorp 277,313 9,516 - (9,516)
Cash dividend $0.35 per share*** - - - (5,706) (5,706)
------------------------------------------------------------------
Balance, December 31, 1998* 15,923,322 95,992 349 62,682 159,023
Net income - - - 37,477 37,477
Other comprehensive loss, net of taxes - - (8,404) - (8,404)
Stock options exercised, including related tax benefit 476,447 4,792 - - 4,792
Stock issued in Employee Stock Purchase Plan 41,651 1,031 - - 1,031
401(k) employee stock purchase 38,005 1,205 - - 1,205
Stock issued in Dividend Reinvestment Plan 5,049 171 - - 171
Pacific Business Funding Corporation distribution - - - (40) (40)
Stock issued through private placement 535,000 18,961 - - 18,961
Cash dividend $0.46 per share*** - - - (7,582) (7,582)
------------------------------------------------------------------
Balance, December 31, 1999* 17,019,474 $122,152 $(8,055) $92,537 $206,634
==================================================================
</TABLE>
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of record
at April 30, 1998.
*** Excluding dividends paid by Greater Bay's subsidiaries prior to the
completion of their mergers with Greater Bay,
Greater Bay paid dividends of $0.48, $0.38 and $0.30 per share in December 31,
1999, 1998 and 1997, respectively.
In 1999, Bay Area Bancshares declared dividends of $0.11 per share. In 1998, Bay
Area Bancshares declared dividends of $0.41 per share, Bay Commercial Services
declared dividends of $0.40 per share and Pacific Business
Funding Corporation made a distribution of $1.2 million to its shareholders. In
1997, Bay Area Bancshares declared dividends of $0.37 per share, Bay Commercial
Services declared dividends of $0.30 per share,
Peninsula Bank of Commerce declared an annual dividend of $3.20 per share,
Pacific Rim Bancorporation declared and paid a dividend of $100,000 to its sole
shareholder and Pacific Business Funding Corporation
A-29
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
(Dollars in thousands) 1999* 1998* 1997*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows - operating activities
Net income $ 37,477 $ 27,715 $ 20,354
Reconcilement of net income to net cash from
operations:
Provision for loan losses 15,809 7,642 9,342
Depreciation and amortization 4,875 2,703 2,359
Deferred income taxes (7,247) (3,480) (4,382)
(Gain) loss on sale of investments, net (34) (421) 18
Gain on sale of building (535) - -
Proceeds from loan sales 74,420 82,869 48,255
Originations of loans held for sale (74,514) (84,432) (52,827)
Changes in:
Accrued interest receivable and other assets (30,794) (12,677) (7,240)
Accrued interest payable and other liabilities 25,082 7,141 4,638
Deferred loan fees and discounts, net 4,505 2,551 2,224
---------- ---------- ----------
Operating cash flows, net 49,044 29,611 22,741
---------- ---------- ----------
CASH FLOWS - INVESTING ACTIVITIES
Maturities and partial paydowns on investment securities:
Held to maturity 78,770 66,495 31,475
Available for sale 86,018 574,634 104,969
Purchase of investment securities:
Held to maturity (95,041) (101,436) (25,765)
Available for sale (180,589) (947,531) (239,533)
Other securities (14,527) (3,760) (682)
Proceeds from sale of available for sale securities 30,141 231,825 21,147
Loans, net (649,175) (356,679) (243,237)
Purchase of property, premises and equipment (7,959) (4,344) (5,098)
Sale of banking building 2,668 - -
Investment in other real estate owned - 1,817 (500)
Purchase of insurance policies (9,206) (23,480) -
---------- ---------- ----------
Investing cash flows, net (758,900) (562,459) (357,224)
---------- ---------- ----------
CASH FLOWS - FINANCING ACTIVITIES
Net change in deposits 767,881 463,273 342,562
Net change in other borrowings - short term 5,515 (41,105) 18,293
Proceeds from other borrowings - long term 2,015 70,000 3,025
Principal repayment - long term borrowings (3,775) (2,265) (865)
Proceeds from company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior subordinated
debentures - 30,000 20,000
Proceeds from sale of common stock 26,126 4,855 6,204
Repurchase of common stock - (2,651) (130)
Cash dividends (7,582) (5,706) (5,888)
---------- ---------- ----------
Financing cash flows, net 790,180 516,401 383,201
---------- ---------- ----------
Net change in cash and cash equivalents 80,324 (16,447) 48,718
Cash and cash equivalents at beginning of period 291,369 307,816 259,098
---------- ---------- ----------
Cash and cash equivalents at end of period $ 371,693 $ 291,369 $ 307,816
========== ========== ==========
CASH FLOWS - SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 89,715 $ 62,421 $ 47,417
========== ========== ==========
Income taxes $ 15,605 $ 17,619 $ 17,219
========== ========== ==========
Non-cash transactions:
Additions to other real estate owned $ - $ 450 $ 1,723
========== ========== ==========
Transfer of appreciated securities to
Greater Bay Bancorp Foundation $ 560 $ 1,341 $ -
========== ========== ==========
</TABLE>
* Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-30
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 And 1997
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company" on a consolidated basis) is a bank holding company operating Bay Area
Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"),
Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mt. Diablo
National Bank ("MDNB"), Mid-Peninsula Bank ("MPB") and Peninsula Bank of
Commerce ("PBC"). The Company also owns GBB Capital I and GBB Capital II, both
of which are Delaware statutory business trusts, which were formed for the
exclusive purpose of issuing and selling Cumulative Trust Preferred Securities
("TPS"). Greater Bay also includes the operating divisions: Greater Bay Bank
Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Santa
Clara Valley Commercial Banking Group, Greater Bay Bank SBA Lending Group,
Greater Bay Corporate Finance Group, Greater Bay International Banking Division,
Greater Bay Trust Company, Pacific Business Funding and the Venture Banking
Group. The Company provides a wide range of commercial banking services to small
and medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. The Company operates throughout
Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 27
offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont,
Hayward, Lafayette, Millbrae, Palo Alto, Pleasanton, Redwood City, San
Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz,
Scotts Valley, Walnut Creek, and Watsonville.
All of the Company's mergers were accounted for as a pooling-of-interests
and, accordingly, all of the financial information for the Company for the
periods prior to the mergers had been restated as if the mergers had occurred at
the beginning of the earliest reporting period presented.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greater Bay
and its wholly owned subsidiaries, BAB, BBC, CCB, CNB, Golden Gate, MDNB, MPB,
PBC, GBB Capital I and GBB Capital II and its operating divisions. All
significant intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the 1999 presentation. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
the prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 And 1997
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, Federal Funds sold and agency securities
with original maturities of less than ninety days. Generally, Federal Funds are
sold for one-day periods. As discussed in Note 7, PBC holds $111.1 million in
one demand deposit account whose funds are comprised of proceeds from a lawsuit
settlement. Due to the uncertainty of the time this special deposit (the
"Special Deposit") will remain with PBC, management has invested a significant
portion of the proceeds in agency securities with maturities of less than 90
days. These securities have been classified as cash and equivalents. BAB, BBC,
CCB, CNB, Golden Gate, MDNB, MPB and PBC are required by the Federal Reserve
System to maintain noninterest-earning cash reserves against certain of their
deposit accounts. At December 31, 1999, the required combined reserves totaled
approximately $4.5 million.
Investment Securities
The Company classifies its investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Investment securities
classified as held to maturity are reported at amortized cost; available for
sale securities are reported at fair value with net unrealized gains and losses
reported (net of taxes) as a component of shareholders' equity. The Company
does not have any trading securities.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income is recognized when earned. Realized gains and
losses for securities classified as available for sale and held to maturity are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
Required investments in Federal Reserve Bank and Federal Home Loan Bank
stocks for the Banks are recorded at cost.
A-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 And 1997
Loans
Loans held for investment are carried at amortized cost. The Company's loan
portfolio consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate as well as
business assets and personal property.
Interest income is accrued on the outstanding loan balances using the
simple interest method. Loans are generally placed on nonaccrual status when the
borrowers are past due 90 days and when full payment of principal or interest is
not expected. At the time a loan is placed on nonaccrual status, any interest
income previously accrued but not collected is generally reversed and
amortization of deferred loan fees is discontinued. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
The Company charges loan origination and commitment fees. Net loan
origination fees and costs are deferred and amortized to interest income over
the life of the loan, using the effective interest method. Loan commitment fees
are amortized to interest income over the commitment period.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.
Sale and Servicing of Small Business Administration ("SBA") Loans
The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of the majority of the loans to an investor and
retains the unguaranteed portion and servicing rights in its own portfolio.
Funding for the SBA programs depend on annual appropriations by the U.S.
Congress.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such loans
between the portion sold, the portion retained and a value assigned to the right
to service the loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method.
Allowance for Loan Losses
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January
1, 1995. Under these standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Under these standards, any
allowance on impaired loans is generally based on one of three methods. It
requires that impaired loans be measured at either, 1) the present value of
expected cash flows at the loan's effective interest rate, 2) the loan's
observable market price, or 3) the fair value of the collateral of the loan. In
general, these statements are not applicable to large groups of smaller-balance
loans that are collectively evaluated for impairment such as credit cards,
residential mortgage, consumer installment loans and certain small business
loans. Income recognition on impaired loans conforms to the method the Company
uses for income recognition on nonaccrual loans.
A-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 And 1997
The allowance for loan losses is maintained at a level deemed appropriate
by management to adequately provide for known losses in the loan portfolio. The
allowance is based upon a number of factors, including prevailing and
anticipated economic trends, industry experience, estimated collateral values,
management's assessment of credit risk inherent in the portfolio, delinquency
trends, historical loss experience, specific problem loans and other relevant
factors.
Additions to the allowance, in the form of provisions, are reflected in
current operating results, while charge-offs to the allowance are made when a
loss is determined to have occurred. Because the allowance for loan losses is
based on estimates, ultimate losses may vary from the current estimates.
Other Real Estate Owned
Other real estate owned ("OREO") consists of properties acquired through
foreclosure and is stated at the lower of carrying value or fair value less
estimated costs to sell. Development and improvement costs relating to the OREO
are capitalized. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to current earnings with a provision
for losses on foreclosed property in the period in which they are identified.
The resulting allowance for OREO losses is decreased when the property is sold.
Operating expenses of such properties, net of related income, are included in
other expenses. Gains and losses on the disposition of OREO are included in
other income.
Property, Premises and Equipment
Property, premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets, which is determined by asset
classification, as follows:
Buildings 40 years
Building improvements 10 years
Furniture and fixtures 7 years
Automobiles 5 years
Computer equipment 2 - 5 years
Other equipment 2 - 7 years
Amortization of leasehold improvements is computed on a straight-line basis
over the shorter of the lease term or the estimated useful lives of the asset,
which is generally 10 years.
Income Taxes
Deferred incomes taxes reflect the estimated future tax effects of
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
A-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Derivatives and Hedging Activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a net-of-tax cumulative-effect-type adjustment of $1.1 million in accumulated
other comprehensive income to recognize at fair value all derivatives that are
designated as cash-flow hedging instruments. There were no net gains or losses
on derivatives that had been previously deferred or gains and losses on
derivatives that were previously deferred as adjustments to the carrying amount
of hedged items.
All derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, the Company designates the
derivative as a hedge of a forecasted transaction or a hedge of the variability
of cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge). Changes in the fair value of a derivative that is highly
effective as, and that is designated and qualifies as, a cash-flow hedge are
recorded in other comprehensive income, until earnings are affected by the
variability of cash flows (e.g., when periodic settlements on a variable-rate
asset or liability are recorded in earnings).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
liabilities on the balance sheet. The Company also formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively when (1) it is determined that the derivative is
no longer effective in offsetting changes in the cash flows of a hedged item;
(2) the derivative expires or is sold, terminated, or exercised; or (3)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate. In these situations where hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized in current-period earnings.
All gains or losses that were accumulated in other comprehensive income will be
recognized immediately in earnings upon the discontinuance of hedge accounting.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated other comprehensive income separately from retained
earnings in the equity section of the balance sheet. The changes to the
balances of accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - December 31, 1997 $ 910 $ - $ 910
Other comprehensive income 1998 116 (677) (561)
--------------------------------------------
Balance - December 31, 1998 1,026 (677) 349
Other comprehensive income 1999 (10,585) 2,181 (8,404)
--------------------------------------------
Balance - December 31, 1999 $ (9,559) $1,504 $ (8,055)
============================================
</TABLE>
A-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
NOTE 2-MERGER
Completed Mergers
On May 18, 2000, Coast Bancorp, the holding company of Coast Commercial
Bank ("CCB"), a California state chartered bank, merged with and into Greater
Bay. Upon consummation of the merger, the outstanding shares of Coast Bancorp
were converted into an aggregate of approximately 3,070,000 shares of Greater
Bay's stock. The stock was issued to Coast Bancorp's shareholders in a tax-
free exchange. The transaction was accounted for as a pooling-of-interests.
The financial information presented herein has been restated to reflect the
merger with Coast Bancorp on a pooling-of-interests basis.
On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former
holding company of Mt. Diablo National Bank ("MDNB"), merged with and into
Greater Bay. Upon consummation of the merger, the outstanding shares of MD
Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's
stock. The stock was issued to MD Bancshares' shareholders in a tax-free
exchange. The transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated to reflect the merger
with MD Bancshares on a pooling-of-interests basis.
On October 15, 1999, Bay Commercial Services ("BCS"), the parent of Bay
Bank of Commerce, merged with and into Greater Bay. Upon consummation of the
merger, the outstanding shares of BCS were converted into an aggregate of
907,240 shares of Greater Bay's stock. The stock was issued to former BCS
shareholders, in a tax-free exchange accounted for as a pooling-of-interests.
On May 21, 1999, Bay Area Bancshares ("BA Bancshares"), the former holding
company of Bay Area Bank, merged with and into Greater Bay. Upon consummation
of the merger, the outstanding shares of BAB were converted into an aggregate of
1,399,321 shares of Greater Bay's stock. The stock was issued to former BA
Bancshares shareholders, in a tax-free exchange accounted for as a pooling-of-
interests.
On August 31, 1998, Pacific Business Funding Corporation ("PBFC"), an
asset-based specialty finance company, merged with a subsidiary of Greater Bay.
Upon consummation of the merger, the outstanding shares of PBFC were converted
into an aggregate of 298,000 shares of Greater Bay's stock. The stock was
issued to former PBFC shareholders, in a tax-free exchange accounted for as a
pooling-of-interests.
On May 8, 1998, Pacific Rim Bancorporation ("PRB"), the former holding
company of Golden Gate, merged with and into a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of PRB were converted into an
aggregate of 950,748 shares of Greater Bay's stock. The stock was issued to
former PRB's sole shareholder in a tax-free exchange accounted for as a pooling-
of-interests.
A-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 And 1997
On December 23, 1997, PBC merged with a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of PBC were converted into an
aggregate of 1,328,000 shares (as adjusted to reflect the 2-for-1 stock split)
of Greater Bay's stock. The stock was issued to former PBC shareholders, in a
tax-free exchange accounted for as a pooling-of-interests.
Pending Mergers (unaudited)
On January 26, 2000, Greater Bay, Bank of Santa Clara ("BSC") and GBB
Merger Corp. signed a definitive agreement for a merger between BSC and GBB
Merger Corp., as a result of which BSC will become a wholly owned subsidiary of
Greater Bay. The agreement provides for BSC shareholders to receive
approximately 2,017,000 shares of Greater Bay stock subject to certain
adjustments based on movements in Greater Bay's stock price in a tax-free
exchange to be accounted for as a pooling-of-interests. The transaction is
expected to be completed in the second quarter of 2000 subject to regulatory and
shareholder approvals. As of and for the year ended December 31, 1999, BSC had
$20.0 million in net interest income, $6.9 million in net income, $326.9 million
in assets, $293.7 million in deposits and $31.4 million in shareholders' equity.
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS Corp.
signed a definitive agreement for a merger between BOP and DKSS, as a result of
which BOP will become a wholly owned subsidiary of Greater Bay. The agreement
provides for BOP shareholders to receive approximately 990,000 shares of Greater
Bay stock subject to certain adjustments based on movements in the Company's
stock price in a tax-free exchange to be accounted for as a pooling-of-
interests. The transaction is expected to be completed in the fourth quarter of
2000 subject to BOP's shareholders and regulatory approvals. As of and for the
year ended December 31, 1999, BOP had $8.6 million in net interest income, $2.3
million in net income, $194.7 million in assets, $162.2 million in deposits and
$14.9 million in shareholder's equity.
A-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 And 1997
The following table sets forth the separate results of operations for
Greater Bay, BA Bancshares, BCS, PBFC, PRB, MD Bancshares and Coast Bancorp for
the periods indicated:
Year ended December 31,
(Dollars in thousands) Net Interest Income Net Income
- --------------------------------------------------------------------
(Dollars in thousands)
1999
----
Greater $103,732 $27,711
MD Bancshares 10,009 2,827
Coast Bancorp 20,028 6,939
-------- -------
Combined $133,769 $37,477
======== =======
1998
----
Greater Bay $ 65,448 $16,578
BA Bancshares 8,170 2,365
Bay Commercial Services 6,107 1,215
-------- -------
Subtotal 79,725 20,158
MD Bancshares 7,363 1,396
Coast Bancorp 17,363 6,161
-------- -------
Combined $104,451 $27,715
======== =======
1997
----
Greater Bay $ 47,776 $10,013
PRB 4,750 996
PBFC 1,942 610
BA Bancshares 6,781 1,805
Bay Commercial Services 5,389 1,061
-------- -------
Subtotal 66,638 14,485
MD Bancshares 4,295 714
Coast Bancorp 15,183 5,155
-------- -------
Combined $ 86,116 $20,354
======== =======
Assuming the acquisitions of MD Bancshares, Coast Bancorp, BSC and BOP had
been completed at December 31, 1999, Greater Bay would have had, on a pooled
basis, 1999 proforma net interest income of $162.4 million and net income, on a
pooled basis, of $44.1 million.
In all mergers, certain reclassifications were made to conform to the
Company's financial presentation. The results of operations previously reported
by the separate enterprises for the periods before the merger was consummated
and that are included in the current combined amounts presented in the
accompanying consolidated financial statements are summarized below.
A-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth the composition of the operations of the
Company and BCS, BA Bancshares, PBC, PBFC, PRB and MD Bancshares for the periods
indicated.
<TABLE>
<CAPTION>
Coast Bancorp MD Bancshares BCS BA Bancshares PBFC
Twelve Months ended Twelve months ended Nine months ended Three months ended Six months ended
(Dollars in thousands) December 31, 1999 December 31, 1999 September 30, 1999 March 31, 1999 June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income:
Greater Bay Bancorp $ 113,741 $ 103,732 $ 68,498 $ 18,360 $ 30,077
Acquired Entity 20,028 10,009 2,007 2,180 1,154
----------- ----------- ---------- ---------- ----------
Combined $ 133,769 $ 113,741 $ 70,505 $ 20,540 $ 31,231
=========== =========== ========== ========== ==========
Net income:
Greater Bay Bancorp $ 30,538 $ 27,711 $ 17,033 $ 5,058 $ 6,628
Acquired Entity 6,939 2,827 486 644 344
----------- ----------- ---------- ---------- ----------
Combined $ 37,477 $ 30,538 $ 17,519 $ 5,702 $ 6,972
=========== =========== ========== ========== ==========
<CAPTION>
PRB PBC
Three months ended Nine months ended
(Dollars in thousands) March 31, 1998 September 30, 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Net interest income:
Greater Bay Bancorp $ 13,366 $ 27,922
Acquired Entity 1,285 6,851
----------- -----------
Combined $ 14,651 $ 34,773
=========== ===========
Net income:
Greater Bay Bancorp $ 3,646 $ 6,097
Acquired Entity 60 2,573
----------- -----------
Combined $ 3,706 $ 8,670
=========== ===========
</TABLE>
There were no significant transactions between the Company and any of the
acquired entities prior to the mergers. All intercompany transactions have been
eliminated.
A-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 3-INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is
summarized below:
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1999 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 19,087 $ - $ (249) $ 18,838
U.S. agency notes 28,848 7 (886) 27,969
Mortgage-backed securities 247,223 96 (8,053) 239,264
Tax-exempt securities 55,690 82 (3,395) 52,379
Corporate securities 115,819 - (11,979) 103,840
-------------------------------------------------------------
Total securities available for sale 466,667 185 (24,562) 442,290
-------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - 500
U.S. agency notes 29,482 - (667) 28,815
Mortgage-backed securities 59,524 28 (2,018) 57,534
Tax-exempt securities 52,219 123 (2,710) 49,632
-------------------------------------------------------------
Total securities held to maturity 141,725 151 (5,395) 136,481
-------------------------------------------------------------
Other securities 15,775 8,143 - 23,918
-------------------------------------------------------------
Total investment securities $ 624,167 $ 8,479 $ (29,957) $ 602,689
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1998 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 24,665 $ 82 $ (27) $ 24,720
U.S. agency notes 48,213 47 (8) 48,252
Mortgage-backed securities 222,359 1,793 (147) 224,005
Tax-exempt securities 52,581 1,006 - 53,587
Corporate securities 69,774 110 (1,121) 68,763
-------------------------------------------------------------
Total securities available for sale 417,592 3,038 (1,303) 419,327
-------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,764 2 (2) 1,764
U.S. agency notes 28,495 22 (58) 28,459
Mortgage-backed securities 37,967 174 (207) 37,934
Tax-exempt securities 33,882 1,004 (15) 34,871
-------------------------------------------------------------
Total securities held to maturity 102,108 1,202 (282) 103,028
-------------------------------------------------------------
Other securities 8,090 - - 8,090
-------------------------------------------------------------
Total investment securities $ 527,790 $ 4,240 $ (1,585) $ 530,445
=============================================================
</TABLE>
A-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table shows amortized cost and estimated fair value of the
Company's investment securities by year of maturity as of December 31, 1999.
<TABLE>
<CAPTION>
2001 2005
Through Through 2010 and
(Dollars in thousands) 2000 2004 2009 Thereafter Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 5,125 $ 13,962 $ - $ - $ 19,087
U.S. agency notes (1) 1,254 17,812 9,782 - 28,848
Mortgage-backed securities (2) 1,268 6,882 6,993 232,080 247,223
Tax-exempt securities 891 7,775 8,933 38,091 55,690
Corporate securities 996 - - 114,823 115,819
---------------------------------------------------------------
Total securities available for sale 9,534 46,431 25,708 384,994 466,667
---------------------------------------------------------------
Fair value $ 9,483 $ 46,365 $ 24,966 $ 361,476 $ 442,290
---------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - - 500
U.S. agency notes (1) 2,000 23,993 3,490 - 29,483
Mortgage-backed securities (2) 75 2,082 9,082 48,285 59,524
Tax-exempt securities 996 3,130 11,670 36,422 52,218
---------------------------------------------------------------
Total securities held to maturity 3,571 29,205 24,242 84,707 141,725
---------------------------------------------------------------
Fair value 3,564 28,616 24,024 80,277 136,481
---------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $ 13,105 $ 75,636 $ 49,950 $ 469,701 $ 608,392
---------------------------------------------------------------
Total fair value $ 13,047 $ 74,981 $ 48,990 $ 441,753 $ 578,771
---------------------------------------------------------------
Weighted average yield-total portfolio 5.55% 5.95% 6.59% 7.19% 6.87%
</TABLE>
Investment securities with a carrying value of $305.1 million and $184.5
million were pledged to secure deposits, borrowings and for other purposes as
required by law or contract at December 31, 1999 and 1998, respectively.
Other securities includes unsold shares received through the exercise of
warrant received from clients, equity securities received in settlement of loans
and, investments in the FRB and the FHLB are required in order to maintain
membership and support activity levels.
Proceeds and realized losses and gains on sales of investment securities
for the years ended December 31, 1999, 1998 and 1997 are presented below:
A-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sale of
available for sale
securities (1) $ 30,141 $ 231,825 $ 21,147
Available for sale
securities-gains (losses) (2) $ 33 $ 395 $ (18)
</TABLE>
(1) Proceeds from the sale of available for sale securities excludes $15.3
million related to the sale of equity securities classified as available for
sale which were acquired through the execution of a warrant received from
clients.
(2) Warrant income includes additional gains of $21.2 million related to equity
securities classified as available for sale which were acquired through the
execution of warrants received from clients.
NOTE 4--LOANS AND ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 29,831 $ 23,563 $ 16,308
Provision for loan losses (1) 15,809 7,642 9,342
Loan charge-offs (2,914) (1,936) (2,382)
Recoveries 1,421 562 295
-----------------------------------
Balance, December 31 $ 44,147 $ 29,831 $23,563
===================================
</TABLE>
(1) Includes $2.7 million and $183,000, and $1.4 million of charges in 1999,
1998 and 1997, respectively, to conform accounting practices for the Banks'
reserve methodologies and is included in merger and related nonrecurring
costs in the consolidated statements of operations
A-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth nonperforming loans as of December 31,
1999, 1998 and 1997. Nonperforming loans are defined as loans which are on
nonaccrual status, loans which have been restructured, and loans which are 90
days past due but are still accruing interest. Interest income foregone on
nonperforming loans totaled $418,000, $176,000, and $590,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Interest income recognized on
the nonperforming loans approximated $291,000, $80,000, and $206,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
Nonaccrual loans $ 5,516 $ 3,226 $ 4,292
Accruing loans past
due 90 days or more 51 - 158
Restructured loans 807 796 1,533
------------------------------------
Total nonperforming loans $ 6,374 $ 4,022 $ 5,983
====================================
At December 31, 1999 and 1998, the recorded investment in loans, for
which impairment has been recognized in accordance with SFAS No. 114 and No.
118, was approximately $1.4 million and $2.5 million, respectively, with
corresponding valuation allowances of $365,000 and $802,000 respectively. For
the years ended December 31, 1999 and 1998, the average recorded investment in
impaired loans was approximately $1.0 million and $4.2 million, respectively.
The Company did not recognize interest income on impaired loans during the
twelve months ended December 31, 1999, 1998 and 1997.
The Company had $807,000 and $796,000 of restructured loans as of
December 31, 1999 and 1998, respectively. There were no principal reduction
concessions allowed on restructured loans during 1999 and 1998. Interest income
from restructured loans totaled $45,000, $16,000 and $82,000 for the years ended
December 31, 1999, 1998 and 1997. Foregone interest income, which totaled $0,
$11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997 would
have been recorded as interest income if the loans had accrued interest in
accordance with their original terms prior to the restructurings.
A-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 1999 and 1998, other real estate owned ("OREO")
consisted of properties acquired through foreclosure with a carrying value of
$271,000 and $966,000 million, respectively. These balances are included in
interest receivable and other assets in the accompanying consolidated balance
sheets. There was no allowance for estimated losses.
The following summarizes OREO operations, which are included in
operating expenses, for the years ended December 31, 1999, 1998 and 1997.
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
Real estate operations, net $ 50 $ 24 $ 213
Gain on sale of other real
estate owned (37) 133 (124)
Provision for estimated losses - - 54
----------------------------------
Net loss from other real
estate operations $ 13 $ 157 $ 143
==================================
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment at December 31, 1999 and 1998 are
composed of the following:
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------
Land $ 1,754 $ 2,301
Buildings and premises 4,860 4,901
Leasehold improvements 13,819 9,193
Furniture and equipment 25,211 22,305
Automobiles 424 457
-------------------------
Total 46,068 39,157
Accumulated depreciation
and amortization (20,196) (18,575)
-------------------------
Premises and equipment, net $ 25,872 $ 20,582
=========================
Depreciation and amortization amounted to $4.8 million, $3.4 million
and $3.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively, and have been included in occupancy and equipment expense in the
accompanying consolidated statements of operations.
During 1999, the Company sold bank premises with a carrying value of
$2,637,000 for $4,978,000 in a sale-lease back transaction. The Company
recognized a pre-tax gain of $535,000 on the transaction. Gains of $1,806,000
have been deferred and will be recognized over the 10 year and 5 year terms of
the Company's leases.
A-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 7--DEPOSITS
Deposits as of December 31, 1999 and 1998 are as follows:
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------
Demand, noninterest-bearing $ 598,428 $ 455,721
MMDA, NOW and Savings 1,628,128 1,182,342
Time certificates, $100,000 and over 474,913 270,522
Other time certificates 105,530 130,532
---------------------------
Total deposits $ 2,806,999 $ 2,039,117
===========================
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------
Seven to One to More
Three months Four to six twelve three than
(Dollars in thousands) or less months months years three years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Time deposits, $100,000 and over $ 366,209 $ 70,299 $ 32,763 $ 5,392 $ 250 $ 474,913
Other time deposits 51,714 30,689 15,626 7,314 187 105,530
--------------------------------------------------------------------------
Total $ 417,923 $ 100,988 $ 48,389 $ 12,706 $ 437 $ 580,443
==========================================================================
</TABLE>
At December 31, 1999 and 1998, the Company held $111.1 million and
$89.6 million, respectively from a single depositor on which the Company earned
a spread of 3.1% and 2.25%, respectively. Due to the uncertainty of the time the
deposit will remain outstanding, management has invested a significant portion
in agency securities with maturities of less than 90 days.
NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
GBB Capital I and GBB Capital II (the "Trusts") are Delaware business
trusts wholly-owned by Greater Bay and were formed for the purpose of issuing
Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding Solely Junior Subordinated Debentures ("TPS"). The TPS are
individually described below. Interest on the TPS are payable quarterly and is
deferrable, at the option of the Company, for up to five years. Following the
issuance of each TPS, the Trusts used the proceeds from the TPS offerings to
purchase a like amount of Junior Subordinated Deferrable Interest Debentures
(the "Debentures") of Greater Bay. The Debentures bear the same terms and
interest rates as the related TPS. The Debentures are the sole assets of the
Trusts and are eliminated, along with the related income statement effects, in
the consolidated financial statements. Greater Bay has fully and unconditionally
guaranteed all of the obligations of the Trusts. Under applicable regulatory
guidelines, a portion of the TPS will qualify as Tier I capital, and the
remaining portion will qualify as Tier II capital.
A-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
On March 30, 1997, GBB Capital I completed a public offering of 800,000
shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an aggregate
amount of $20 million. The TPS I accrue interest at an annual rate of 9.75% on
the $20 million liquidation amount of $25 per share of TPS I. The TPS I are
mandatorily redeemable, in whole or in part, upon repayment of the Debentures at
their stated maturity of April 1, 2027 or their earlier redemption. The
Debentures are redeemable prior to maturity at the option of the Company, on or
after April 1, 2002, in whole at any time or in part from time to time.
On August 12, 1998, GBB Capital II completed an offering of 30,000
shares of Floating Rate Trust Preferred Securities, Series A ("the Series A
Securities") in an aggregate amount of $30 million. The Series A Securities
issued in the offering were sold in a private transaction pursuant to an
applicable exemption from registration under the Securities Act. In November
1998, the Company, through GBB Capital II, completed an offer to exchange the
Series A Securities for a like amount of its registered Floating Rate Trust
Preferred Securities, Series B ("TPS II"). The exchange offer was conducted in
accordance with the terms of the initial issuance of the Series A Securities.
The TPS II accrue interest at a variable rate of interest, initially at 7.1875%,
on the liquidation amount of $1,000 per share of TPS II. The interest rate
resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As part of
this transaction, the Company concurrently entered into an interest rate swap to
fix the cost of the offering at 7.55% for 10 years (see note 10). The TPS II are
mandatorily redeemable, in whole or in part, upon repayment of the Debentures at
their stated maturity of September 15, 2028 or their earlier redemption. The
Debentures are redeemable prior to maturity at the option of the Company, on or
after September 15, 2008, in whole at any time or in part from time to time.
The total amount of TPS outstanding at December 31, 1999 and 1998 was
$50 million and the dividends paid on TPS was $4.3 million, $2.8 million and
$1.5 million in 1999, 1998 and 1997, respectively.
A-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 9--BORROWINGS
Other borrowings are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase $ 55,100 $ 17,135
Other short term notes payable 1,500 1,760
Advances under credit lines 7,000 500
--------------------------
Total short term borrowings 63,600 19,395
--------------------------
Long term borrowings:
Securities sold under agreements
to repurchase 10,000 50,000
FHLB advances 27,000 22,000
Promissory notes - 2,450
---------------------------
Total other long term borrowings 37,000 74,450
---------------------------
Total other borrowings $ 100,600 $ 93,845
===========================
Subordinated notes $ - $ 3,000
---------------------------
Total subordinated debt $ - $ 3,000
===========================
</TABLE>
During the years ended December 31, 1999 and 1998, the average balance
of securities sold under short term agreements to repurchase was $20.5 million
and $31.4 million, respectively, and the average interest rates during those
periods were 5.64% and 5.17%, respectively. Securities sold under short term
agreements to repurchase generally mature within 90 days of dates of purchase.
During the years ended December 31, 1999 and 1998, the average balance
of federal funds purchased was $186,302 and $428,554, respectively, and the
average interest rates during those periods were 5.29% and 5.35%, respectively.
There were no such balances outstanding at December 31, 1999 or 1998.
The Company has sold securities under long term agreements to
repurchase which mature in the year 2003 and have an average interest rate of
____%. The counterparties to these agreements have put options which give them
the right to demand early repayment.
The FHLB advances will mature in the year 2003 and have an average
interest rate of 5.43%. The advances are collateralized by securities
pledged to the FHLB. Under the terms of the advances, the FHLB has a put option
which gives it the right to demand early repayment beginning in 1999.
The short term notes payable, which bore an interest rate of 13.76%
and provided for maturity on April 15, 2000, were issued to PBFC's officers
along with other accredited investors within the definition of Rule 501 under
the Securities Act of 1933, as amended. The Company redeemed these notes in
January 1999.
A-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
On March 15, 1999 the Company redeemed the $3.0 million in subordinated
debt issued in 1995. The Company paid a premium of $150,000 ($88,000 net of tax)
on the pay off of the debt. The premium was recorded, net of taxes, as an
extraordinary item in March 1999.
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company currently uses a single interest-rate swap to convert its
floating-rate debt (the TPS II) to fixed rates. This swap was entered into
concurrently with the issuance of the debt being hedged. This swap is accounted
for as a cash flow hedge under SFAS No. 133. This swap possesses a term equal to
the non-callable term of the debt, with a fixed pay rate and a receive rate
indexed to rates paid on the debt and a notional amount equal to the amount of
the debt being hedged. As the specific terms and notional amount of the swap
exactly match those of the debt being hedged the Company meets the "no
ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to be
100% effective and all changes in the fair value of the hedge are recorded in
other comprehensive income with no impact on the income statement for any
ineffective portion. As of December 31, 1999, the unrealized gain on the cash
flow hedge was $1,528,000, net of income taxes, which was included in the
balance of accumulated other comprehensive income. The floating rate TPS II
combined with the cash flow hedge created a synthetic fixed rate debt
instrument. The unrealized gain on the cash flow hedge approximated the
unrealized gain the Company would have incurred if it had issued a fixed rate
debt instrument. Under current accounting practices, as required by SFAS No.
133, the Company was required to record the unrealized gain on the synthetic
fixed rate debt instrument, but it would not have been required to record an
unrealized gain if it had issued fixed rate debt.
The notional amount of the swap is $30.0 million with a term of 10
years expiring on September 15, 2008. The Company intends to use the swap as a
hedge of the related debt for 10 years. The periodic settlement date of the swap
results in the reclassifying as earnings the gains or losses that are reported
in accumulated comprehensive income. For the year ended December 31, 1997, the
Company did not have any derivative instruments.
The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality counterparties that
are reviewed periodically by the Company's credit committee.
NOTE 11--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 1999, 1998 and 1997:
A-48
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 19,686 $ 13,831 $ 12,635
State 6,404 4,736 3,995
--------------------------------------
Total current 26,090 18,567 16,630
--------------------------------------
Deferred:
Federal (6,199) (2,766) (3,273)
State (1,690) (714) (1,120)
Reduction of tax due to utilization
of NOL - - 11
--------------------------------------
Total deferred (7,889) (3,480) (4,382)
--------------------------------------
Total expense $ 18,201 $ 15,087 $ 12,248
======================================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. The tax effects
of temporary differences that gave rise to significant portions of the deferred
tax assets and liabilities at December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 14,627 $ 10,133
Unrealized losses on securities 9,357 (218)
State income taxes 4,121 2,658
Deferred compensation 2,903 2,291
Accumulated depreciation 563 369
Net operating losses 14 159
Purchase allocation adjustments 8 22
Other (124) (874)
--------------------------
Net deferred tax asset $ 31,469 $ 14,540
==========================
</TABLE>
Management believes that the Company will fully realize its total
deferred income tax assets as of December 31, 1999 based upon the Company's
recoverable taxes from prior carryback years, and its current level of operating
income.
At December 31, 1999, the Company had a federal tax net operating loss
carryforward of approximately $40,000 expiring in the beginning of the year
2010.
Under provisions of the United States income tax laws these loss
carryovers are subject to limitation due to the acquisition of Pacific Rim
Bancorporation in 1998. Management does not believe that these limitations will
prevent the realization of the benefit of the loss carryovers during the
carryover periods.
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 1999, 1998
and 1997:
A-49
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
California franchise tax
expense, net of federal
income tax benefit 5.4% 6.1% 6.2%
---------------------------------------------
40.4% 41.1% 41.2%
Tax exempt income -2.3% -2.2% -1.7%
Contribution of appreciated securities -4.9% -1.1% 0.0%
Non-deductible merger
costs 0.2% 0.7% 1.5%
Other, net -0.8% -3.3% -3.4%
---------------------------------------------
Effective income tax rate 32.6% 35.2% 37.6%
=============================================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 12--OTHER INCOME AND OPERATING EXPENSES
Other income in 1999, 1998 and 1997 included warrant income of $14.5
million, $945,000 and $1.2 million net of related employee incentives of $7.3
million, $396,000 and $500,000, respectively. The Company occasionally receives
warrants to acquire common stock from companies that are in the start-up or
development phase. The timing and amount of income derived from the exercise and
sale of client warrants typically depend upon factors beyond the control of the
Company, and cannot be predicted with any degree of accuracy and are likely to
vary materially from period to period. Occupancy costs for the years ended
December 31, 1999, 1998 and 1997 were $8.6 million, $7.2 million and $6.1
million, respectively.
Merger and other related nonrecurring costs for the years ended
December 31, 1999, 1998 and 1997 were comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial advisory and professional fees $ 1,627 $ 1,101 $ 1,083
Charges to conform accounting practices 2,745 183 1,350
Other costs 5,959 1,377 900
------------------------------------------
Total $ 10,331 $ 2,661 $ 3,333
==========================================
</TABLE>
Other costs include severance and other compensation expenses, charges
for the write-off of assets retired as a result of the merger, and other
expenses including printing costs and filing fees.
A-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Other expenses for the years ended December 31, 1999, 1998 and 1997
were comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone, postage and supplies $ 3,081 $ 2,744 $ 2,298
Legal and other professional fees 2,795 2,979 3,077
Marketing and promotion 2,277 2,128 2,136
Client services 2,047 1,504 1,087
Data processing 1,512 986 1,004
Directors fees 952 1,174 1,132
Insurance 630 558 523
FDIC insurance and regulatory
assessments 618 504 450
Other real estate owned 13 129 211
Other 6,413 6,409 5,017
------------------------------------------
$ 20,338 $ 19,115 $ 16,935
==========================================
</TABLE>
To support the Greater Bay Bancorp Foundation (the "Foundation"), the
Company contributed appreciated securities, which had an unrealized gain of $7.8
million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4
million in compensation and other expenses in connection with these appreciated
securities. The Company recorded $12.2 million in 1999 and $1.3 million in 1998
of expense for the contribution to the Foundation, which is included in
operating expenses.
In July 1995, the Company settled a lawsuit of $1.1 million, net of
tax. The Company recovered those losses through insurance coverage for this
settlement in 1997. However, due to the uncertainty associated with the
recovery, the Company reflected the settlement expense as a charge to 1995
earnings, and the associated recovery in 1997 as a recovery to earnings.
NOTE 13--EMPLOYEE BENEFIT PLANS
Stock Option Plan
On November 19, 1997, the Company's shareholders approved an amendment
of the Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to
increase by 912,652 the number of shares of Greater Bay stock issuable under the
Bancorp Plan. This was done to accommodate the increased number of eligible
employees as a result of the merger with PBC.
Under the terms of the respective mergers, all stock option plans of
BAB, BBC and MDNB were terminated at the time of merger and all outstanding
options from these plans were assumed by the Bancorp Plan. The CCB Stock Option
Plan was assumed by the company. Outstanding options from the CCB plan of
189,798 (converted at a ratio of .6338), options outstanding from the MDNB plan
of 72,714 (converted at a ratio of 0.9532), outstanding options from the BAB
plan of 29,834 shares (converted at a ratio of 1.38682) and outstanding options
from the BBC plan of 108,318 shares (converted at a ratio of 0.6833) were
assumed by the Bancorp Plan.
Options issued under the Bancorp Plan may be granted to employees and
nonemployee directors and may be either incentive or nonqualified stock options
as defined under current tax laws. The exercise price of each option must equal
the market price of the Company's stock on the date of grant. The term of an
option may not exceed 10 years and generally vests over a five year period.
A-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
At December 31, 1999 the total authorized shares issuable under the
Bancorp Plan was approximately 2,279,000 shares and the number of shares
available for future grants was approximately 110,000 shares.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the
provisions of SFAS No. 123, the Company is encouraged, but not required, to
measure compensation costs related to its employee stock compensation plans
under the fair value method. If the Company elects not to recognize compensation
expense under this method, it is required to disclose the pro forma net income
and net income per share effects based on the SFAS No. 123 fair value
methodology. The Company implemented the requirements of SFAS No. 123 in 1997
and has elected to adopt the disclosure provisions of this statement.
At December 31, 1999, the Company had one stock option plan, which is
described above. The Company applies Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting the Bancorp Plan. Accordingly,
no compensation cost has been recognized for its stock option plan. Had
compensation for the Company's stock option plan been determined consistent with
SFAS No. 123, the Company's net income per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 37,477 $ 27,715 $ 20,354
Pro forma 34,684 25,755 19,473
Basic net income per share
As reported $ 2.29 $ 1.75 $ 1.34
Pro forma 2.12 1.63 1.28
Diluted net income per share
As reported $ 2.17 $ 1.63 $ 1.25
Pro forma 2.01 1.52 1.18
</TABLE>
A-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1999, 1998 and 1997, respectively; dividend
yield of 1.5%, 1.75% and 1.8%; expected volatility of 29.69%, 39.84% and 22.9%;
risk free rates of 6.29%, 4.54% and 6.3%. The weighted average expected life is
5 years. No adjustments have been made for forfeitures. The actual value, if
any, that the option holder will realize from these options will depend solely
on the increase in the stock price over the option price when the options are
exercised.
A summary of the Company's stock option plan as of December 31, 1999,
1998, and 1997 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Weighted Weighted
Shares Average Shares Average
(000's) Exercise Price (000's) Exercise Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,335 $ 16.95 1,963 $ 10.94
Granted 697 37.30 687 30.19
Exercised (292) 10.02 (284) 7.49
Forfeited (71) 25.12 (32) 16.38
----------------------------------------------------------------
Outstanding at end of year 2,669 22.80 2,335 16.95
----------------------------------------------------------------
Options exercisable at year-end 1,183 12.47 1,132 9.11
----------------------------------------------------------------
Weighted average fair value of options
granted during the year $ 12.16 $ 12.09
--------- ----------------
<CAPTION>
1997
--------------------------------
Weighted
Shares Average
(000's) Exercise Price
---------------------------------
<S> <C> <C>
Outstanding at beginning of year 1.623 $ 7.27
Granted 563 18.48
Exercised (194) 5.07
Forfeited (29) 7.76
---------------------------------
Outstanding at end of year 1,963 10.99
---------------------------------
Options exercisable at year-end 1,135 7.45
---------------------------------
Weighted average fair value of options
granted during the year $ 6.75
-----------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999 (as adjusted for the 2-for-1 stock split).
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- -----------------------------------
Number Number
Exercise Outstanding Weighted Average Weighted Average Exercisable Weighted Average
Price Range (000's) Exercise Price Remaining Life (years) (000's) Exercise Price
- -------------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
$3.06 - $5.25 118 $ 3.93 3.11 107 $ 4.31
$5.30 - $9.38 646 7.29 4.84 516 7.03
$10.22 - $17.58 380 13.14 6.92 321 12.32
$21.13 - $29.50 429 25.62 7.94 147 25.43
$29.56 - $35.03 504 33.49 8.96 90 33.58
$35.88 - $40.81 592 38.50 9.96 1 39.50
</TABLE>
401(k) Savings Plan
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary (up to 15%) as a
contribution to the plan. The Company matches the employees' contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of deferral
of an individual's total compensation). The matching contribution vests ratably
over the first four years of employment.
For the years ended December 31, 1999, 1998 and 1997, the Company
contributed $1.2 million, $939,000 and $741,000, respectively to the 401(k)
plan.
A-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Employee Stock Purchase Plan
The Company has established an Employee Stock Purchase Plan, as
amended, under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 15% of their compensation toward the purchase of
the Company's stock for an aggregate total of 461,869 shares. Under the plan the
purchase price is 85% of the lower of the fair value at the beginning or end of
each three month offering period. During 1999, employees purchased 41,651 shares
of common stock for an aggregate purchase price of $1,031,000 compared to the
purchase of 29,670 shares of common stock for an aggregate purchase price of
$656,000 in 1998 and 30,320 shares of common stock for an aggregate purchase
price of $347,000 in 1997. There were 262,993 shares remaining in the plan
available for purchase by employees at December 31, 1999.
All share amounts have been restated to reflect the 2-for-1 stock split
declared to shareholders of record as of April 30, 1998.
Supplemental Employee Compensation Benefits Agreements
The Company has entered into supplemental employee compensation
benefits agreements with certain executive and senior officers. Under these
agreements, the Company is generally obligated to provide for each such employee
or their beneficiaries, during their life for a period of up to 15 to 20 years
after the employee's disability or retirement, benefits as defined in each
specific agreement. The agreement also provides for a death benefit for the
employee. The estimated present value of future benefits to be paid is being
accrued over the vesting period of the participants. The related accumulated
accrued liability of at December 31, 1999 and 1998 is approximately $3.7 million
and $2.7 million, respectively. The actuarial assumptions used for determining
the present value of the projected benefit obligation include a 7% discount
rate. Expenses accrued for this plan for the years December 31, 1999, 1998 and
1997 totaled $1.2 million, $601,000 and $575,000, respectively. Depending on the
agreement, the Company and the employees are beneficiaries of life insurance
policies that have been purchased as a method of financing the benefits under
the agreements. At December 31, 1999 and 1998, the Company's cash surrender
value of these policies was approximately $50.9 million and $34.5 million,
respectively and is included in other assets. The income recognized on these
polices was $1.6 million, $1.0 million and $434,000 in 1999, 1998 and 1997,
respectively, and is included in other income.
Deferred Compensation Plan
Effective November 19, 1997, the Company adopted the Greater Bay
Bancorp 1997 Elective Deferral Compensation Plan (the "Deferred Plan") that
allows eligible officers and directors of the Company to defer a portion of
their bonuses, director fees and other compensation. The deferred compensation
will earn interest calculated annually based on a short-term interest reference
rate. All participants are fully vested at all times in their contributions to
the Deferred Plan. At December 31, 1999 and 1998, $1.9 million and $834,000,
respectively, of deferred compensation under this plan is included in other
liabilities in the accompanying consolidated balance sheets.
Additionally, under deferred compensation agreements that were
established at CCB and PBC prior to its merger with the Company, there was
approximately $2.3 million and $2.3 million of deferred compensation which is
included in other liabilities at December 31, 1999 and 1998, respectively.
A-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Change in Control
In the event of a change in control, the supplemental employee
compensation benefits agreements with certain executive and senior officers may
require the Company to make certain payments under those agreements. The Company
also has plans in place which would require certain payments be made to any
employee whose employment is terminated pursuant to a change in control. These
potential liabilities are currently not recognized in the accompanying
consolidated financial statements.
NOTE 14--RELATED PARTY TRANSACTIONS
The Company has, and expects to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers and their affiliates. These transactions are entered into under terms
and conditions equal to those entered into in arms length transactions and are
made subject to approval by the Directors' Loan Committee and the Board of
Directors of the Bank extending the credit. An analysis of total loans to
related parties for the years ended December 31, 1999 and 1998 is shown below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $ 42,307 $ 18,067
Additions
21,414 38,369
Repayments
(40,875) (14,129)
------------------------------
Balance, December 31 $ 22,846 $ 42,307
==============================
Undisbursed commitments,
at year end $ 9,129 $ 7,302
==============================
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain facilities at which it conducts its
operations. Future minimum lease commitments under all noncancelable operating
leases as of December 31, 1999 are below:
(Dollars in thousands)
Years Ended December 31,
- -----------------------------------------------------------
<S> <C>
2000 $ 4,954
2001 5,218
2002 4,227
2003 2,339
2004 1,994
Thereafter 9,756
---------
Total $ 28,488
=========
</TABLE>
A-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1999, 1998,
and 1997 was $821,000, $923,000, and $1.1 million, respectively. Gross rental
expense for the years ended December 31, 1999, 1998, and 1997 was $5.8 million,
$4.6 million, and $4.2 million, respectively.
Other Commitments and Contingencies
The Company occasionally receives warrants to acquire common stock from
borrowers that are in the start-up or development phase as consideration for
provided financing. As of December 31, 1999, the Company had a portion of its
warrants and common stock of these clients in escrow with an approximate fair
value of $2.8 million. These equity securities are being held in escrow for the
Company's benefit pending resolution of certain contingencies. Although
realization is not assured, Management believes it is more likely than not that
this amount will be realized. The amount considered realizable could be reduced
if stock prices of the companies fall.
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. Commitments to fund loans were $884.2 million and $680.9 million and
letters of credit were $56.4 million and $24.6 million, at December 31, 1999 and
1998, respectively. The Company's exposure to credit loss is limited to amounts
funded or drawn; however, at December 31, 1999, no losses are anticipated as a
result of these commitments.
Loan commitments which have fixed expiration dates and require the
payment of a fee are typically contingent upon the borrower meeting certain
financial and other covenants. Approximately $235.6 million of these commitments
relate to real estate construction and land loans and are expected to fund
within the next 12 months. However, the remainder relates primarily to revolving
lines of credit or other commercial loans, and many of these commitments are
expected to expire without being drawn upon, therefore the total commitments do
not necessarily represent future cash requirements. The Banks evaluate each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or equity
securities, or business assets.
Stand-by letters of credit are conditional commitments written by the
Banks to guarantee the performance of a client to a third party. These
guarantees are issued primarily related to purchases of inventory by the Banks'
commercial clients, and are typically short-term in nature. Credit risk is
similar to that involved in extending loan commitments to clients, and the Banks
accordingly use evaluation and collateral requirements similar to those for loan
commitments.
In the ordinary course of business there are various assertions, claims
and legal proceedings pending against the Company. Management is of the opinion
that the ultimate resolution of these proceedings will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
NOTE 16 - SHAREHOLDERS' RIGHTS PLAN
In 1998 Greater Bay adopted a shareholder rights plan designed to
maximize the long-term value of the Company and to protect the Company's
shareholders from improper takeover tactics and takeover bids that are not fair
to all shareholders.
A-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
In accordance with the plan, preferred share purchase rights were
distributed as a dividend at the rate of one right for each common share held of
record as of the close of business on November 28, 1998. The rights, which are
not immediately exercisable, entitle the holders to purchase one one-hundredth
of a share of Series A Preferred Stock at a price of $145.00 upon the occurrence
of certain triggering events. In the event of an acquisition not approved by the
Board, each right enables its holder (other than the acquirer) to purchase the
Preferred Stock at 50% of the market price. Further, in the event the Company is
acquired in an unwanted merger or business combination, each right enables the
holder to purchase shares of the acquiring entity at a similar discount. Under
certain circumstances, the rights may be exchanged for common shares of the
Company. The Board may, in its sole discretion, redeem the rights at any time
prior to any of the triggering events.
The rights can be exercised and separate rights certificates
distributed only if any of the following events occur: acquisition by a person
of 10% or more of the Company's common share; a tender offer for 10% or more of
the Company's common shares; or ownership of 10% or more of the Company's common
shares by a shareholder whose actions are likely to have a material adverse
impact on the Company or shareholder interests. The rights will initially trade
automatically with the common shares. The rights are not deemed by the Board of
Directors to be presently exercisable.
NOTE 17--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks' assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Banks'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Banks to maintain minimum capital amounts and ratios (as
defined in the regulations) and are set forth in the table below. At December
31, 1999 and 1998 the Company and the Banks met all capital adequacy
requirements to which they are subject.
A-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Under the FDICIA prompt corrective action provisions applicable to banks,
the most recent notification from the FDIC or OCC categorized each of the Banks,
with the exception of MDNB, as well-capitalized. To be categorized as
well-capitalized, the institution must maintain a total risk-based capital ratio
as set forth in the following table and not be subject to a capital directive
order. There are no conditions or events since that notification that management
believes have changed the risk-based capital category of any of the Banks. The
Company and the Banks' actual 1999 and 1998 capital amounts and ratios are as
follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1999 Actual Adequacy Purposes Action Provisions
------------------- ------------------- -----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------- ------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 291,885 10.95% $ 213,249 8.00% N/A
Bay Area Bank 15,104 10.50 11,511 8.00 $ 14,396 10.00%
Bay Bank of Commerce 12,004 10.12 9,484 8.00 11,856 10.00
Coast Commercial Bank 37,426 13.80 21,771 8.00 27,213 10.00
Cupertino National Bank 97,081 11.03 70,398 8.00 57,097 10.00
Golden Gate Bank 14,645 10.19 11,494 9.00 14,368 10.00
Mid-Peninsula Bank 65,923 10.02 52,656 8.00 65,820 10.00
Mt. Diablo National Bank 15,192 8.20 14,823 8.00 16,529 10.00
Peninsula Bank of Commerce 22,458 10.86 16,544 8.00 20,680 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 254,764 9.56% $ 106,625 4.00% N/A
Bay Area Bank 13,285 9.23 5,768 4.00 $ 8,634 6.00%
Bay Bank of Commerce 10,507 8.86 4,742 4.00 7,113 6.00
Coast Commercial Bank 34,020 12.50 10,685 4.00 16,329 6.00
Cupertino National Bank 82,337 9.36 35,199 4.00 52,798 6.00
Golden Gate Bank 12,846 8.94 5,747 4.00 6,621 6.00
Mid-Peninsula Bank 57,692 6.77 26,328 4.00 39,492 6.00
Mt. Diablo National Bank 12,875 5.95 7,411 4.00 11,117 6.00
Peninsula Bank of Commerce 19,659 9.60 8,272 4.00 12,408 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 254,764 8.02% $ 126,160 4.00% N/A
Bay Area Bank 13,265 7.60 6,915 4.00 $ 8,519 5.00%
Bay Bank of Commerce 10,507 7.12 5,900 4.00 7,375 5.00
Coast Commercial Bank 34,020 9.40 14,538 4.00 16,172 5.00
Cupertino National Bank 82,337 8.05 40,896 4.00 51,120 5.00
Golden Gate Bank 12,846 6.56 7,844 4.00 9,805 5.00
Mid-Peninsula Bank 57,692 7.47 30,683 3.00 36,604 5.00
Mt. Diablo National Bank 12,875 7.76 7,828 4.00 9,785 5.00
Peninsula Bank of Commerce 19,859 7.32 10,847 4.00 13,559 5.00
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1999 Actual Adequacy Purposes Action Provisions
------------------- ------------------- -----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------- ------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 231,970 12.39% $ 146,073 8.00% N/A
Bay Area Bank 15,800 13.77 9,179 8.00 $ 11,474 10.00%
Bay Bank of Commerce 11,817 9.50 9,976 8.00 12,470 10.00
Coast Commercial Bank 31,196 14.80 16,856 8.00 21,069 10.00
Cupertino National Bank 59,224 10.12 46,822 8.00 58,527 10.00
Golden Gate Bank 10,194 11.01 7,406 8.00 9,257 10.00
Mid-Peninsula Bank 47,111 11.51 32,747 8.00 40,863 10.00
Mt. Diablo National Bank 11,716 9.00 10,416 8.00 13,021 10.00
Peninsula Bank of Commerce 16,256 12.37 11,809 8.00 14,761 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 193,712 10.34% $ 73,036 4.00% N/A
Bay Area Bank 14,385 12.52 4,590 4.00 $ 6,886 6.00%
Bay Bank of Commerce 10,837 8.70 4,988 4.00 7,482 6.00
Coast Commercial Bank 26,549 13.60 8,246 4.00 12,642 6.00
Cupertino National Bank 48,645 8.35 23,411 4.00 35,116 6.00
Golden Gate Bank 9,036 9.76 3,703 4.00 5,554 6.00
Mid-Peninsula Bank 41,990 10.26 16,373 4.00 24,560 6.00
Mt. Diablo National Bank 10,115 7.77 5,208 4.00 7,912 6.00
Peninsula Bank of Commerce 16,408 11.12 5,904 4.00 8,857 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 193,712 8.24% $ 92,359 4.00 N/A
Bay Area Bank 14,365 10.34 4,500 4.00 $ 6,948 5.00%
Bay Bank of Commerce 10,837 7.90 5,620 4.00 6,901 5.00
Coast Commercial Bank 28,549 9.10 12,574 4.00 15,717 5.00
Cupertino National Bank 48,845 7.47 26,136 4.00 32,673 5.00
Golden Gate Bank 9,036 9.30 5,243 4.00 6,554 5.00
Mid-Peninsula Bank 41,990 8.54 15,927 3.00 26,544 5.00
Mt. Diablo National Bank 10,115 6.08 6,658 4.00 8,323 5.00
Peninsula Bank of Commerce 16,409 6.65 9,759 4.00 12,198 5.00
</TABLE>
A-58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 18--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
Total dividends which may be declared by the Banks without receiving
prior approval from regulatory authorities are limited to the lesser of the
Banks' retained earnings or the net income of the Banks for the latest three
fiscal years, less dividends previously declared during that period.
The Banks are subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates. In
particular, the Banks are prohibited from lending to Greater Bay unless the
loans are secured by specified types of collateral. Such secured loans and other
advances from the Banks are limited to 10% of the Banks' shareholders' equity,
or a maximum of $20.7 million at December 31, 1999. No such advances were made
during 1999 or exist as of December 31, 1999.
A-59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 19-EARNINGS PER SHARE
Per Share Data
Net income per share is stated in accordance with SFAS No. 128
"Earnings per Share". Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
year. Diluted net income per share is computed by dividing net income by the
weighted average number of common shares plus common equivalent shares
outstanding including dilutive stock options. All years presented include the
effect of the 2-for-1 stock split effective as of April 30, 1998.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the year ended December 31, 1999
---------------------------------------------
(Dollars in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 37,477
Basic net income per share:
Income available to common shareholders 37,477 16,341,000 $ 2.29
Effect of dilutive securities:
Stock options - 943,000 -
---------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 37,477 17,284,000 $ 2.17
=============================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
---------------------------------------------
(Dollars in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 27,715
Basic net income per share:
Income available to common shareholders 27,715 15,798,000 $ 1.75
Effect of dilutive securities:
Stock options - 1,197,000 -
---------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 27,715 16,995,000 $ 1.63
=============================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
---------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per (Numerator) (Denominator) Amount
share amounts)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 20,354
Basic net income per share:
Income available to common shareholders 20,354 15,241,000 $ 1.34
Effect of dilutive securities:
Stock options - 1,087,000 -
---------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 20,354 16,328,000 $ 1.25
=============================================
</TABLE>
A-60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
There were options to purchase 517,000 shares and 89,000 shares that
were considered anti-dilutive whereby the options' exercise price was greater
than the average market price of the common shares, during the years ended
December 31, 1999 and 1998, respectively. There were no options that were
considered anti-dilutive during the year ended December 31, 1997.
Weighted average shares outstanding and all per share amounts included
in the consolidated financial statements and notes thereto are based upon the
increased number of shares giving retroactive effect to the 2000 mergers with
CCB at a 0.6338 conversion ratio and MDNB at a 0.9532 conversion ratio, 1999
mergers with BCS at a 0.6833 conversion ratio and BA Bancshares at a 1.38682
conversion ratio, the 1998 mergers with PRB and PBFC at a total of 950,748 and
298,000 shares, respectively, and the 1997 merger with PBC at a 0.96550
conversion ratio.
NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The financial statements of Greater Bay Bancorp (parent company only)
are presented below:
PARENT COMPANY ONLY--BALANCE SHEETS
December 31,
------------------------------
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 2,837 $ 7,703
Investment in subsidiaries 236,921 181,723
Other investments 16,143 18,056
Subordinated debentures
issued by subsidiary - 3,000
Other assets 17,690 9,691
------------------------------
Total assets $ 273,591 $ 220,173
==============================
Liabilities and
shareholders' equity:
Subordinated debt 58,547 54,547
Other liabilities 8,410 6,603
------------------------------
Total liabilities 66,957 61,150
Shareholders' equity:
Common stock 122,152 95,707
Accumulated other comprehensive income (8,055) 349
Retained earnings 92,537 62,967
------------------------------
Total shareholders' equity 206,634 159,023
------------------------------
Total liabilities and
shareholders' equity $ 273,591 $ 220,173
==============================
A-61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
PARENT COMPANY ONLY-STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 521 $ 1,073 $ 485
Cash dividend from subsidiaries 1,580 3,015 1,413
Other income - 71 501
------------------------------------------
Total 2,101 4,159 2,399
------------------------------------------
Expenses:
Interest expense 4,382 3,195 1,458
Salaries 15,684 8,908 5,978
Occupancy and equipment 3,820 2,031 1,218
Merger expenses 3,283 1,877 712
Other expenses 5,806 3,596 2,041
Less: rentals and fees received
from Banks (26,201) (15,866) (10,201)
------------------------------------------
Total 6,774 3,741 1,206
------------------------------------------
Income (loss) before taxes and equity
in undistributed net income of subsidiaries (4,673) 418 1,193
Income tax benefit (2,684) (1,650) (270)
------------------------------------------
Income (loss) before equity in undistributed
net income of subsidiaries (1,989) 2,068 1,463
------------------------------------------
Equity in undistributed net income of
subsidiaries 39,466 25,647 18,891
------------------------------------------
Net income $ 37,477 $ 27,715 $ 20,354
==========================================
</TABLE>
A-62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows-operating activities
Net income $ 37,477 $ 27,715 $ 20,354
Reconciliation of net income
to net cash from operations:
Equity in undistributed net
income of subsidiaries (39,466) (25,647) (18,891)
Net change in other assets (9,791) (4,598) (1,984)
Net change in other liabilities 4,420 2,140 2,442
-------------------------------------
Operating cash flow, net (7,360) (390) 1,921
-------------------------------------
Cash flows-investing activities
Purchases of available for sale
securities (20,825) (84,130) (8,293)
Proceeds from sale and maturities
of available for sale securities 20,980 71,939 3,136
Proceeds from sale of OREO - 407 -
Dividends from subsidiaries 4,166 3,449 3,617
Capital contribution to
the subsidiaries (27,218) (17,500) (13,818)
-------------------------------------
Investing cash flows, net (22,897) (25,835) (15,358)
-------------------------------------
Cash flows-financing activities
Net change in other borrowings - short 7,000 - -
Repurchase of common stock (2,651) (130)
Proceeds from private placement of stock 18,954 - -
Proceeds from issuance of
subordinated debt - 30,000 20,618
Stock issued in dividend reinvestment 171 - -
Proceeds from exercise
of stock options and employees
stock purchases 6,888 5,661 2,985
Payment of cash dividends (7,622) (7,193) (5,660)
-------------------------------------
Financing cash flows, net 25,391 25,817 17,813
-------------------------------------
Net increase in cash and
cash equivalents (4,866) (408) 4,376
Cash and cash equivalents
at the beginning of the year 7,703 8,111 3,735
-------------------------------------
Cash and cash equivalents
at end of the year $ 2,837 $ 7,703 $ 8,111
=====================================
</TABLE>
A-63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 21--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. The estimated fair value of financial
instruments of the Company as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Carrying Carrying
(Dollars in thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 125,886 $ 125,886 $ 112,843 $ 112,843
Short term investments 245,807 245,807 178,526 178,526
Investment securities 607,933 602,689 529,525 530,445
Loans, net 2,085,342 2,069,153 1,453,256 1,453,271
Accrued interest receivable 18,908 18,908 11,954 11,954
Financial liabilities:
Deposits:
Demand, noninterest-bearing 598,428 598,428 455,721 455,721
MMDA, NOW and Savings 1,628,128 1,628,128 1,182,342 1,182,342
Time certificates, $100,000 and over 474,913 470,826 270,522 282,770
Other time certificates 105,530 104,783 130,532 138,097
Other borrowings 100,600 99,790 93,845 95,475
Subordinated debt - - 3,000 2,999
Company obligated mandatory redeemable
preferred securities of subsidiary trust holding
solely junior subordinated debentures 50,000 49,468 50,000 48,829
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Cash Equivalents
The carrying value reported in the balance sheet for cash and cash
equivalents approximates fair value.
Investment Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer term investments, except certain state and
municipal securities, is estimated based on quoted market prices or bid
quotations from securities dealers.
A-64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. The fair value of performing variable rate loans is judged to
approximate book value for those loans whose rates reprice in less than 90 days.
Rate floors and rate ceilings are not considered for fair value purposes as the
number of loans with such limitations is not significant.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
Deposit Liabilities and Borrowings
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities. The fair value of core
deposits does not reflect the market core deposits premium of approximately 10%
- - 12%. Additionally, the fair value of deposits does not include the benefit
that results from the low cost of funding provided by the Company's deposits as
compared to the cost of borrowing funds in the market.
Commitments to Extend Credit and Standby Letters of Credit
The majority of the Company's commitments to extend credit carry current
market interest rate if converted to loans. Because these commitments are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts and is excluded from the table.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic condition, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have significant effect on
fair value estimates and have been considered in many of the estimates.
A-65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 22--ACTIVITY OF BUSINESS SEGMENTS
In 1998 the Company adopted SFAS No. 131. The prior year's segment
information has been restated to present the Company's two reportable segments,
community banking and trust operations.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies." Segment data includes
intersegment revenue, as well as charges allocating all corporate-headquarters
costs to each of its operating segments. Intersegment revenue is recorded at
prevailing market terms and rates and is not significant to the results of the
segments. This revenue is eliminated in consolidation. The Company evaluates the
performances of its segments and allocates resources to them based on net
interest income, other income, net income before income taxes, total assets and
deposits.
The Company is organized primarily along community banking and trust
divisions. Ten of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers, property
managers, business executives, professional and other individuals. The GBB Trust
division has been shown as the "trust operations" segment. The Company's
business is conducted principally in the U.S.; foreign operations are not
material.
The following table shows each segments key operating results and financial
position for the years ended or as of December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ----------------------------- ---------------------------
Community Trust Community Trust Community Trust
(Dollars in thousands) banking operations banking operations banking operations
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 137,261 $ 369 $ 104,968 $ 859 $ 86,082 $ 141
Other income 15,062 3,007 9,995 2,488 7,396 2,092
Operating expenses 49,187 2,863 48,748 2,429 47,281 1,966
Net income before income taxes (1) 101,091 121 62,753 918 44,194 267
Total assets 3,148,674 - 2,306,823 - 1,778,637 -
Deposits 2,749,168 57,831 1,971,578 67,539 1,509,523 66,321
Assets under management - 697,435 - 649,336 - 577,746
</TABLE>
(1) Includes intercompany earnings alloaction charge which is eliminated in
consolidation
A-66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
A reconciliation of total segment net interest income and other income
combined, net income before income taxes, and total assets to the consolidated
numbers in each of these categories for the years ended December 31, 1999, 1998
and 1997 is presented below.
<TABLE>
<CAPTION>
As of and for Year Ended
December 31,
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 155,699 $ 118,310 $ 95,711
Parent company net interest income and other income 1,538 2,553 4,549
------------------------------------------------
Consolidated net interest income and other income $ 157,237 $ 120,863 $ 100,260
================================================
Net income before taxes
Total segment net income before income taxes $ 101,212 $ 63,671 $ 44,461
Parent company net income before income taxes (25,433) (11,487) (4,310)
------------------------------------------------
Consolidated net income before income taxes $ 75,779 $ 52,184 $ 40,151
================================================
Total assets
Total segment assets $ 3,148,674 $ 2,306,823 $ 1,778,637
Parent company segment assets 67,422 67,142 43,121
------------------------------------------------
Consolidated total assets $ 3,216,096 $ 2,373,965 $ 1,821,758
================================================
</TABLE>
NOTE 23 - SUBSEQUENT EVENTS
On March 23, 2000, we completed an offering of 10.875% capital securities
in an aggregate amount of $9.5 million through GBB Capital III, a wholly owned
trust subsidiary formed for the purpose of the offering. The securities issued
in the offering were sold in a private transaction pursuant to an applicable
exemption from registration under the Securities Act. As a result of the
transaction, we have $59.5 million in capital securities outstanding.
On March 23, 2000, we also consummated the sale of 324,324 shares of our
common stock in a private transaction pursuant to a Securities Purchase
Agreement dated as of March 22, 2000, between us and certain investors
identified therein. The shares were sold at a purchase price of $37.00 per
share, or approximately $12 million, net of offering related expenses. On April
26, 2000, we filed a registration statement to register the shares for resale.
NOTE 24--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary results for the stated eight
quarters:
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31,
------------------ ------------------ ------------------ -------------------
(Dollars in thousands, except per share data) (1) 1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 63,489 $ 45,268 $ 56,410 $ 44,748 $ 51,514 $ 41,229 $ 46,186 $ 38,262
Net interest income 38,846 27,991 34,757 26,909 31,562 25,233 28,605 23,794
Provision for loan losses 6,232 2,201 3,752 2,287 1,917 1,732 1,163 1,251
Other income 22,132 5,147 6,534 4,293 4,715 4,321 4,635 4,052
Other expenses 33,712 18,804 20,442 17,680 22,197 18,221 18,677 16,624
Income before taxes 21,034 12,133 17,096 11,235 12,163 9,600 13,400 9,971
Net income 12,240 8,010 10,642 7,274 6,562 5,982 8,033 6,423
Net income per share (before merger, non-recurring and extraordinary items):
Basic $ 0.71 $ 0.50 $ 0.65 $ 0.47 $ 0.55 $ 0.45 $ 0.51 $ 0.37
Diluted $ 0.67 $ 0.46 $ 0.62 $ 0.43 $ 0.52 $ 0.41 $ 0.48 $ 0.34
</TABLE>
*Quarterly amounts have been restated on a historical basis to reflect the
mergers with BA Bancshares, Bay Commercial Services, MD Bancshares and Coast
Commercial Bancorp on a pooling of interests basis.
A-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Greater Bay Bancorp:
We have audited the accompanying supplemental consolidated balance sheets of
Greater Bay Bancorp and its subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related supplemental consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Greater Bay Bancorp and Coast Bancorp on May 18, 2000, which has
been accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. Accounting principles generally
accepted in the United States proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Greater Bay Bancorp
and subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Greater Bay Bancorp and its subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 18, 2000
A-68
<PAGE>
EXHIBIT 99.2
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Dollars in thousands) (unaudited) 1999
- ---------------------------------------------------------------------------------------------------------------------
<S>
ASSETS <C> <C>
Cash and due from banks $ 154,301 $ 125,886
Federal funds sold 308,700 215,550
Other short term securities 805 30,257
--------------------------
Cash and cash equivalents 463,806 371,693
Investment securities:
Available for sale, at fair value 479,817 444,897
Held to maturity, at amortized cost (fair value $220,587 and $136,481 at
March 31, 2000 and December 31, 1999, respectively) 225,892 141,725
Other securities 19,817 21,311
--------------------------
Investment securities 725,526 607,933
Loans:
Commercial 956,341 845,422
Term real estate-commercial 641,163 595,499
--------------------------
Total commercial 1,597,504 1,440,921
Real estate construction and land 474,916 459,349
Real estate-other 117,628 111,703
Consumer and other 116,880 128,120
Deferred loan fees and discounts (11,255) (10,604)
--------------------------
Total loans, net of deferred fees 2,295,673 2,129,489
Allowance for loan losses (48,650) (44,147)
--------------------------
Total loans, net 2,247,023 2,085,342
Property, premises and equipment 23,285 25,872
Interest receivable and other assets 147,597 125,256
--------------------------
Total assets $3,607,237 $3,216,096
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 704,486 $ 598,428
MMDA, NOW and savings 1,845,627 1,628,127
Time certificates, $100,000 and over 524,432 474,914
Other time certificates 84,555 105,530
--------------------------
Total deposits 3,159,100 2,806,999
Other borrowings 97,124 100,600
Other liabilities 58,698 51,863
--------------------------
Total liabilities 3,314,922 2,959,462
--------------------------
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trust holding solely junior subordinated debentures 59,500 50,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued - -
Common stock, no par value: 24,000,000 shares authorized;
17,517,905 and 17,019,475 shares issued and outstanding
as of March 31, 2000 and December 31, 1999, respectively 134,024 122,152
Accumulated other comprehensive loss (9,463) (8,055)
Retained earnings 108,254 92,537
--------------------------
Total shareholders' equity 232,815 206,634
--------------------------
Total liabilities and shareholders' equity $3,607,237 $3,216,096
==========================
</TABLE>
See notes to supplemental consolidated financial statements.
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands, except per share amounts)(unaudited) 2000 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Interest on loans $ 53,380 $ 36,370
Interest on investment securities:
Taxable 10,004 6,399
Tax - exempt 1,548 1,067
-----------------------------
Total interest on investment securities 11,552 7,466
Other interest income 4,521 2,350
-----------------------------
Total interest income 69,453 46,186
-----------------------------
INTEREST EXPENSE
Interest on deposits 24,803 15,299
Interest on long term borrowings 1,076 1,054
Interest on other borrowings 1,658 1,227
-----------------------------
Total interest expense 27,537 17,580
-----------------------------
Net interest income 41,916 28,606
Provision for loan losses 5,314 1,163
-----------------------------
Net interest income after provision for loan losses 36,602 27,443
-----------------------------
OTHER INCOME
Service charges and other fees 1,351 1,214
Loan and international banking fees 1,176 673
Trust fees 924 721
ATM network revenue 569 645
Gain on sale of SBA loans 452 813
Gain (Loss) on sale of investments, net (1) 61
Other income 2,931 463
-----------------------------
Total, recurring 7,402 4,590
Warrant income, net 8,609 4
-----------------------------
Total other income 16,011 4,594
-----------------------------
OPERATING EXPENSES
Compensation and benefits 12,835 10,521
Occupancy and equipment 4,357 3,415
Legal and other professional fees 920 659
Telephone, postage and supplies 864 845
Client services 702 609
Marketing and promotion 686 567
FDIC insurance and regulatory assessments 240 139
Directors fees 153 250
Other real estate owned 10 21
Other 1,985 1,611
-----------------------------
Total, recurring 22,752 18,637
Merger and other related nonrecurring costs 3,881 -
-----------------------------
Total operating expenses 26,633 18,637
-----------------------------
Income before provision for income taxes and extraordinary items 25,980 13,400
Provision for income taxes 10,472 5,280
-----------------------------
Net income before extraordinary items 15,508 8,120
Extraordinary items - (88)
-----------------------------
Net income 15,508 8,032
=============================
Net income per share - basic $ 0.91 $ 0.50
=============================
Net income per share - diluted $ 0.87 $ 0.47
=============================
</TABLE>
See notes to supplemental consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31,
(Dollars in thousands) (unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 15,508 $ 8,032
------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding losses arising during period (net of taxes
of $(852) and $(179) for the three months ended March 31,
2000 and 1999, respectively) (1,658) (649)
Reclassification adjustment for gains included in
net income 1 -
-----------------------------------
Net change (1,659) (649)
Cash flow hedge:
Net derivative gains arising during period (net of taxes of
$177 and $586 for the three months ended March 31, 2000 and 1999,
respectively) 253 838
Reclassification adjustment for expenses included
in net income (net of taxes of $1 and $(30) for the three
months ended March 31, 2000 and 1999, respectively) 2 (43)
-----------------------------------
Net change 251 881
-----------------------------------
Other comprehensive income (1,408) 232
-----------------------------------
Comprehensive income $ 14,100 $ 8,264
===================================
</TABLE>
See notes to supplemental consolidated financial statements.
3
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands) (unaudited) 2000 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows - operating activities
Net income $ 15,508 $ 8,032
Reconcilement of net income to net cash from operations:
Provision for loan losses 5,314 1,163
Depreciation and amortization 1,218 1,002
Deferred income taxes (1,856) (209)
(Gain) loss on sale of investments, net - (61)
Proceeds from loan sales 20,205
Origination of loans held for sale (16,459)
Changes in:
Accrued interest receivable and other assets (16,958) (1,710)
Accrued interest payable and other liabilities 7,262 4,201
Deferred loan fees and discounts, net 1,054 1,445
---------------- ----------------
Operating cash flows, net 15,288 13,863
---------------- ----------------
Cash flows - investing activities
Maturities and partial paydowns on of investment securities:
Held to maturity 13,904 4,094
Available for sale 1,978 25,302
Purchase of investment securities:
Held to maturity (98,098) (7,320)
Available for sale (40,006) (106,386)
Other securities 1,494 (47)
Proceeds from sale of available for sale securities 194 71,690
Loans, net (171,392) (165,668)
Purchase of property, premises and equipment 1,069 (2,752)
Purchase of insurance policies (2,524) (1,935)
---------------- ----------------
Investing cash flows, net (293,381) (183,022)
---------------- ----------------
Cash flows - financing activities
Net change in deposits 352,101 218,657
Net change in other borrowings - short term (3,476) (5,399)
Principal repayment - long term borrowings - (3,000)
Company obligated madatorially redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures issued 9,500 -
Proceeds from sale of common stock 14,782 1,875
Cash dividends (2,701) (2,146)
---------------- ----------------
Financing cash flows, net 370,206 209,987
---------------- ----------------
Net change in cash and cash equivalents 92,113 44,282
Cash and cash equivalents at beginning of period 371,693 291,369
---------------- ----------------
Cash and cash equivalents at end of period $ 463,806 $ 335,651
================ ================
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 28,619 $ 37,552
Income taxes $ 1,172 $ 7,729
Non-cash transactions:
Additions to other real estate owned $ - $ 105
</TABLE>
See notes to supplemental consolidated financial statements.
4
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of March 31, 2000, and the Consolidated
Statements of Operations, Comprehensive Income and Cash Flows for the three
months ended March 31, 2000 and March 31, 1999 have been prepared by Greater Bay
Bancorp (the "Company") and are not audited. The results of operations for the
quarter ended March 31, 2000 are not necessarily indicative of the results
expected for any subsequent quarter or for the entire year ended December 31,
2000. The supplemental consolidated financial statements should be read in
conjunction with the supplemental consolidated financial statements for the year
ended December 31, 1999 included in this Current Report on Form 8-K file as of
March 31, 2000.
Consolidation and Basis of Presentation
The unaudited financial information presented was prepared on the same
basis as the audited financial statements for the year ended December 31, 1999.
The consolidated financial statements include the accounts of Greater Bay
Bancorp ("Greater Bay" on a parent-only basis, and the "Company" on a
consolidated basis) and its wholly owned subsidiaries, Bay Area Bank ("BAB"),
Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"), Cupertino National
Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB"), Mt.
Diablo National Bank ("MDNB"), Peninsula Bank of Commerce ("PBC"), GBB Capital
I, GBB Capital II and GBB Capital III and its operating divisions. All
significant intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior periods consolidated financial
statements to conform to the current presentation. In the opinion of management
such unaudited financial statements reflect all adjustments necessary for fair
statement of the results of operations and balances for the interim period
presented. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and the prevailing practices within the
banking industry.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires the Company to classify items of other
comprehensive income by their nature in the financial statements and display the
accumulated other comprehensive income separately from retained earnings in the
equity section of the balance sheet. The changes to the balances of accumulated
other comprehensive income are as follows:
<TABLE>
<CAPTION>
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - December 31, 1999 $ (9,559) $ 1,504 $ (8,055)
Current period change (1,659) 251 (1,408)
--------------------------------------------------------
Balance - March 31, 2000 $ (11,218) $ 1,755 $ (9,463)
========================================================
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income
- ---------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ 1,026 $ (677) $ 349
Current period change (649) 881 232
--------------------------------------------------------
Balance - March 31, 1999 $ 377 $ 204 $ 581
========================================================
</TABLE>
5
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
NOTE 2--MERGERS
On January 26, 2000, Greater Bay, Bank of Santa Clara ("BSC") and GBB
Merger Corp. signed a definitive agreement for a merger between BSC and GBB
Merger Corp., as a result of which BSC will become a wholly owned subsidiary of
Greater Bay. The agreement provides for BSC shareholders to receive
approximately 2,017,000 shares of Greater Bay stock subject to certain
adjustments based on movements in Greater Bay's stock price in a tax-free
exchange to be accounted for as a pooling-of-interests. The transaction is
expected to be completed in the early third quarter of 2000, subject to
regulatory and shareholder approvals.
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS Corp.
signed a definitive agreement for a merger between BOP and DKSS, as a result of
which BOP will become a wholly owned subsidiary of Greater Bay. The agreement
provides for BOP shareholders to receive approximately 990,000 shares of Greater
Bay stock subject to certain adjustments based on changes in the Company's stock
price in a tax-free exchange to be accounted for as a pooling-of-interests. The
transaction is expected to be completed in the fourth quarter of 2000, subject
to BOP's shareholders and regulatory approvals.
6
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
The following table sets forth certain historical information concerning
the operations of the Company, BSC and BOP for the period indicated and proforma
combined information assuming the acquisitions had been consummated at the
beginning of the period presented.
For the three months ended
(Dollars in thousands) March 31, 2000
- -----------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 41,916
BSC 4,958
BOP 2,231
----------------------------
Combined $ 49,105
============================
Provision for loan
losses:
Greater Bay Bancorp $ 5,314
BSC 225
BOP 15
----------------------------
Combined $ 5,554
============================
Net income:
Greater Bay Bancorp $ 15,508
BSC 1,221
BOP 567
----------------------------
Combined $ 17,296
============================
There are currently no significant transactions between the Company and each of
BSC and BOP.
7
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
NOTE 3--PROPERTY, PREMISES AND EQUIPMENT
During the first quarter of 2000, the Company sold bank premises with a
carrying value of $4.8 million for $5.4 million in a sale-lease back
transaction. No gain was recognized on the transaction. Gains of $535,000 have
been deferred and will be recognized over the term of the Company's lease.
NOTE 4--BORROWINGS
Other borrowings are detailed as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------
<S> <C> <C>
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase $45,000 $ 55,100
Short term notes payable 1,124 1,500
Fed Fund Purchases 14,000 -
Advances under credit lines 25,000 7,000
------------------------------------
Total short term borrowings 85,124 63,600
------------------------------------
Long term borrowings:
Securities sold under agreements
to repurchase - 10,000
FHLB advances 12,000 27,000
------------------------------------
Total other long term borrowings 12,000 37,000
------------------------------------
Total other borrowings $97,124 $ 100,600
====================================
</TABLE>
During the three month period ended March 31, 2000 and the twelve month
period ended December 31, 1999, the average balance of securities sold under
short term agreements to repurchase were $69.4 million and $25.5 million,
respectively, and the average interest rates during those periods were 5.79% and
5.49%, respectively. Securities sold under short term agreements to repurchase
generally mature within 90 days of dates of purchase.
During the three month period ended March 31, 2000 and the twelve month
period ended December 31, 1999, the average balance of federal funds purchased
was $154,000 and $186,000, respectively, and the average interest rates during
those periods were 6.50% and 5.29%, respectively. There were $14.0 million
outstanding at March 31, 2000 and no such balances outstanding at December 31,
1999.
The $10.0 million FHLB advances will mature in 2002. They are callable by
the FHLB beginning in November 2000 and bear interest at a weighted average rate
of 5.8%. The remaining FHLB advances of $2.0 million will mature in the year
2003 and have an average interest rate of 5.47%. The advances are collateralized
by securities pledged to the FHLB. Under the terms of the advances, the FHLB has
a put option which gives it the right to demand early repayment.
8
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
NOTE 5--PER SHARE DATA
Net income per share is stated in accordance with SFAS No. 128 "Earnings
Per Share". Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares plus common equivalent shares outstanding including
dilutive stock options.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended For the three months ended
March 31, 2000 March 31, 1999
------------------------------------- -------------------------------------
Average Average
Income Shares Per Share Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 15,508 $ 8,032
Basic net income per share:
Income available to common shareholders 15,508 17,088,000 $ 0.91 8,032 16,078,000 $ 0.50
Effect of dilutive securities:
Stock options - 821,000 - - 986,000 -
------------------------------------- -------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 15,508 17,909,000 $ 0.87 $ 8,032 17,064,000 $ 0.47
===================================== =====================================
</TABLE>
There were options to purchase 6,475 and 475,125 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the three months ended
March 31, 2000 and 1999, respectively.
Weighted average shares outstanding and all per share amounts included in
the consolidated financial statements and notes thereto are based upon the
increased number of shares giving retroactive effect to the 2000 mergers with
Coast Commercial Bank ("CCB") at a 0.6338 conversion ratio and Mt. Diablo
Bancshares ("MD Bancshares") at a 0.9532 conversion ratio and the 1999 mergers
with Bay Commercial Services ("BCS") at a 0.6833 conversion ratio and Bay Area
Bancshares ("BA Bancshares") at a 1.38682 conversion ratio.
NOTE 6--ACTIVITY OF BUSINESS SEGMENTS
The Company adopted SFAS No. 131. The accounting policies of the segments
are the same as those described in the "Summary of Significant Accounting
Policies." Segment data includes intersegment revenue, as well as charges
allocating all corporate-headquarters costs to each of its operating segments.
The Company evaluates the performances of its segments and allocates resources
to them based on net interest income, other income, net income before income
taxes, total assets and deposits.
9
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
The Company is organized primarily along community banking and trust
divisions. Fourteen of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers, property
managers, business executives, professional and other individuals. The trust
division has been shown as the "trust operations" segment. The Company's
business is conducted principally in the U.S.; foreign operations are not
material.
The following table shows each segment's key operating results and
financial position for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
--------------------------------------------------------------------------
Community Trust Community Trust
(Dollars in thousands) Banking Operations Banking Operations
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 42,437 $ 118 $ 29,424 $ 57
Other income 14,671 863 3,411 725
Operating expenses, excluding
merger and
other related nonrecurring 23,564 650 18,354 718
costs
Net income before income taxes (1) 28,275 286 13,391 (9)
Total assets 3,504,655 - 2,539,520 -
Deposits 3,096,997 62,103 2,212,297 45,477
Assets under management - 751,677 - 630,490
</TABLE>
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
A reconciliation of total segment net interest income and other income
combined, net income before income taxes, and total assets to the consolidated
numbers in each of these categories for the three months ended March 31, 2000
and 1999 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------- ------------------
<S> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 58,089 $ 33,617
Parent company net interest income and other income (162) (417)
-------------- --------------
Consolidated net interest income and other income $ 57,927 $ 33,200
============== ==============
Net income before taxes, merger
related nonrecurring costs and extraordinary items
Total segment net income before taxes $ 28,561 $ 13,382
Parent company net income before taxes 1,300 18
-------------- --------------
Consolidated net income before taxes,
merger and other related costs and
extraordinary items $ 29,861 $ 13,400
============== ==============
Total assets
Total segment assets $3,504,655 $2,539,520
Parent company assets 102,582 55,501
-------------- --------------
Consolidated total assets $3,607,237 $2,595,021
============== ==============
</TABLE>
10
<PAGE>
NOTE 7--CASH DIVIDEND
The Company declared a cash dividend of $0.15 cents per share payable on
April 15, 2000 to shareholders of record as of March 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay is a bank holding company operating BAB, BBC, CCB, CNB, Golden
Gate, MPB, MDNB, and PBC. The Company also owns and operates GBB Capital I, GBB
Capital II, and GBB Capital III which are Delaware statutory business trusts,
which were formed for the exclusive purpose of issuing and selling Cumulative
Trust Preferred Securities ("TPS"). Greater Bay also includes the operating
divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont
Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater
Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay
International Banking Division, Greater Bay Trust Company, Pacific Business
Funding and the Venture Banking Group. The Company provides a wide range of
commercial banking services to small and medium-sized businesses, real estate
developers, property managers, business executives, professionals and other
individuals. The Company operates throughout Silicon Valley, the San Francisco
Peninsula and the East Bay Region, with 27 offices located in Aptos, Blackhawk,
Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Palo Alto,
Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San
Ramon, Santa Clara, Santa Cruz, Scotts Valley, Walnut Creek, and Watsonville.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the Company's
consolidated financial data included elsewhere in this document. Certain
statements under this caption constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include but are not limited to economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuation in interest rates, credit quality and government
regulation.
RESULTS OF OPERATIONS
Net income for the first quarter of 2000 increased 93.1% to $15.5 million,
or $0.87 per diluted share, compared to net income of $8.0 million, or $0.47 per
diluted share, for the first quarter of 1999. The first quarter 2000 results
included nonrecurring warrant income of $8.6 million compared to nonrecurring
warrant income of $4,000 during the first quarter of 1999. In addition, the
first quarter of 2000 included nonrecurring merger related costs and
extraordinary items of $2.4 million compared to nonrecurring merger related
costs and extraordinary items of $88,000 in the first quarter of 1999. As a
result, net income, including nonrecurring warrant income and excluding
nonrecurring merger related expenses and extraordinary items, increased 120.5%
to $17.9 million, or $1.00 per diluted share, for the first quarter of 2000,
compared to $8.1 million, or $0.48 per diluted share, in the first quarter of
1999.
Greater Bay Bancorp's core earnings, which is its net income, excluding
nonrecurring warrant income, merger related costs and extraordinary items, for
the first quarter of 2000 increased 58.64% to $12.9 million, or $0.72 per
diluted share, compared to $8.1 million, or $0.48 per diluted share, in the
first quarter of 1999. Based on its core earnings for the first quarter of
2000, Greater Bay Bancorp's return on average equity was 23.17%, its return on
average assets was 1.50% and its efficiency ratio was 45.98%. During the first
quarter of 1999, Greater Bay Bancorp's core earnings resulted in return on
average equity of 20.13%, return on average assets of 1.35% and an efficiency
ratio of 56.14%.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table summarizes net income, net income per share and key
financial ratios inclusive of and exclusive of merger, nonrecurring and
extraordinary items for the three month periods presented:
<TABLE>
<CAPTION>
Income before merger, Income after technology gains Income after merger,
nonrecurring and before merger and nonrecurring
and extraordinary items extraordinary items and extraordinary items
---------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) March 31, March 31, March 31, March 31, March 31, March 31,
2000 1999 2000 1999 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $12,878 $ 8,118 $17,897 $ 8,116 $ 15,508 $ 8,032
Net income per share
Basic $ 0.75 $ 0.50 $ 1.05 $ 0.50 $ 0.91 $ 0.50
Diluted $ 0.72 $ 0.48 $ 1.00 $ 0.48 $ 0.87 $ 0.47
Return on average assets 1.50% 1.35% 2.08% 1.34% 1.81% 1.33%
Return on average shareholders' equity 23.17% 20.13% 32.20% 20.12% 27.90% 19.91%
</TABLE>
The Company reported net income of $15.5 million for the three months ended
March 31, 2000, a 93.1% increase over the three months ended March 31, 1999 net
income of $8.0 million. Basic net income per share was $0.91 for the three
months ended March 31, 2000, as compared to $0.50 for the three months ended
March 31, 1999. Diluted net income per share was $0.87 and $0.47 for the three
months ended March 31, 2000 and 1999, respectively. The return on average assets
and return on average shareholders' equity were 1.81% and 27.90% for the three
months ended March 31, 2000, compared with 1.33% and 19.91% for the three months
ended March 31, 1999.
The 93.1% increase in 2000 net income as compared to 1999 was the result of
significant growth in loans, investments, trust assets and deposits. For the
three months ended March 31, 2000, net interest income increased 46.5% as
compared to the three months ended March 31, 1999. This increase was primarily
due to a 41.7% increase in average interest-earning assets for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. The
increases in loans, trust assets and deposits also contributed to the 32.3%
increase in trust fees, loan and international banking fees, service charges and
other fees. Other income includes $2.1 million in appreciation recognized on
the conversion of equity securities received in the settlement of a loan into a
publicly traded equity security. Increases in operating expenses were required
to service and support the Company's growth. As a result, increases in revenue
were partially offset for the three months ended March 31, 2000 by a 22.1%
increase in recurring operating expenses, as compared to the three months ended
March 31, 1999.
For the three months ended March 31, 2000, merger and related nonrecurring
costs were $2.4 million, net of taxes, as compared to $0 the three months ended
March 31, 1999. Warrant income, net of related expenses and taxes, was $5.1
million for the three months ended March 31, 2000 as compared to $2,000 for the
three months ended March 31, 1999.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income
The following table presents, for the quarters indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average
daily balances.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
March 31, 2000 December 31, 1999 March 31, 1999
----------------- -------------------- --------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
- ------------------------------------------------------------------ ------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 275,679 $ 4,053 5.90% $ 278,843 $ 4,355 6.20% $ 110,955 $ 1,288 4.71%
Other short term securities 30,583 468 6.14% 17,365 300 6.85% 69,493 1,062 6.20%
Investment securities:
Taxable 568,025 10,004 7.06% 527,332 8,594 6.47% 420,943 6,399 6.17%
Tax-exempt (1) 117,549 1,548 5.28% 106,852 1,300 4.83% 91,846 1,067 4.71%
Loans (2), (3) 2,208,556 53,380 9.69% 2,017,723 48,940 9.62% 1,565,961 36,370 9.42%
---------- ------- ---------- ------- ---------- ------
Total interest-earning assets 3,200,392 69,453 8.70% 2,948,115 63,489 8.54% 2,259,198 46,186 8.29%
Noninterest-earning assets 243,902 228,857 188,211
---------- ------- ---------- ------- ---------- ------
Total assets $3,444,294 69,453 $3,176,972 63,489 $2,447,409 46,186
========== ------- ========== ------- ========== ------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,771,550 17,263 3.91% $1,645,959 15,391 3.71% 1,197,128 9,750 3.30%
Time deposits, over $100,000 490,693 6,257 5.11% 451,614 5,459 4.80% 357,715 4,115 4.67%
Other time deposits 105,138 1,283 4.89% 109,050 1,282 4.66% 129,365 1,434 4.50%
---------- ------- ---------- ------- ---------- ------
Total interest-bearing deposits 2,367,381 24,803 4.20% 2,206,623 22,132 3.98% 1,684,208 15,299 3.68%
Other borrowings 107,512 1,658 6.19% 100,173 1,456 5.77% 86,274 1,156 5.43%
Subordinated debt - - - - 2,443 71 11.79%
---------- ------- ---------- ------- ---------- ------
Total interest-bearing
liabilities 2,474,893 26,461 4.29% 2,306,796 23,588 4.06% 1,772,925 16,526 3.78%
Trust Preferred Securities 50,940 1,076 8.47% 50,000 1,054 8.36% 50,000 1,054 8.55%
---------- ------- ---------- ------- ---------- ------
Total interest-bearing
liabilities and capital
securities 2,525,833 27,537 4.37% 2,356,796 24,642 4.15% 1,822,925 17,580 3.91%
Noninterest-bearing deposits 635,374 594,811 431,170
Other noninterest-bearing
liabilities 60,163 40,419 29,742
Shareholders' equity 222,924 184,946 163,572
---------- ---------- ----------
Total liabilities and
shareholders' equity $3,444,294 27,537 $3,176,972 24,642 $2,447,409 17,580
========== ------- ========== ------- ========== -------
Net interest income $41,916 $38,847 $28,606
======= ======= =======
Including capital securities:
----------------------------------
Interest rate spread 4.33% 4.40% 4.38%
Contribution of interest free funds 0.92% 0.83% 0.76%
Net yield on interest-earnings assets (4) 5.25% 5.23% 5.14%
Excluding capital securities:
-----------------------------------
Interest rate spread 4.42% 4.49% 4.51%
Contribution of interest free funds 0.97% 0.88% 0.81%
Net yield on interest-earnings assets (5) 5.39% 5.37% 5.32%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.66%,
6.99% and 6.83% for the quarters ended March 31, 2000, December 31, 1999
and March 31, 1999, respectively, using the federal statuory rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $1,739,000, $1,597,000 and $1,491,000
for the quarters ended March 31, 2000, December 31, 1999 and March 31,
1999, respectively.
(4) Equals (a) the difference between interest income on interest-earning
assets and the interest expense on interest-bearing liabilities and capital
securities, divided by (b) average interest-earning assets for the period.
(5) Equals (a) the difference between interest income on interest-earning
assets and the interest expense on interest-bearing liabilities, divided by
(b) average interest-earning assets for the period.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net interest income, excluding interest expense on the Trust Preferred
Securities issued by the Company ("capital securities"), for the first quarter
of 2000 was $43.0 million, a $3.1 million increase over the fourth quarter of
1999 and a $13.3 million increase over the first quarter of 1999. The increase
from the first quarter of 1999 to the first quarter of 2000 was primarily due to
the $941.2 million, or 41.7% increase in average interest-earning assets. The
increase from the fourth quarter of 1999 to the first quarter of 2000 was
primarily due to the $252.3 million, or 8.6% increase in average interest-
earning assets, which was further increased by a 2 basis points increase in the
Company's net yield on interest-earning assets from 5.37% in the fourth quarter
of 1999 to 5.39% in the first quarter of 2000.
The interest rate spread for the quarters ended March 31, 2000, December
31, 1999 and March 31, 1999, were reduced by the low spread earned on PBC's
Special Deposits (discussed in Note 7 to the consolidated financial statements
and notes thereto included in the Current Report on Form 8-K filed on February
1, 2000. As of March 31, 2000, PBC held $99.7 million in two demand deposits
accounts (the "Special Deposits"). The Special Deposits represent the proposed
settlement of class action lawsuits not involving the Company. Due to the
uncertainty of the time the Special Deposits will remain with PBC, management
has invested a significant portion of the funds from this deposit in agency
securities with maturities of less than 90 days. The average deposit balances
related to the Special Deposits were $101.1 million, $121.5 million and $99.0
million for the quarters ended March 31, 2000, December 31, 1999 and March 31,
1999 respectively, on which the Company earned a spread of approximately 3.05%,
3.10% and 3.00%, respectively. Excluding PBC's Special Deposits, the net yield
on interest earning assets would have been 5.46%, 5.47% and 5.43% for the
quarters ended March 31, 2000, December 31, 1999 and March 31, 1999
respectively. Excluding the Special Deposits, the approximate interest rate
spread would have been 4.36%, 4.43% and 4.46% for the quarters ended March 31,
2000, December 31, 1999 and March 31, 1999 respectively. The purchase of bank-
owned life insurance ("BOLI") also reduced the Company's net interest spread
since the earnings of BOLI are included in other income while the cost of
funding BOLI is included in interest expense.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the quarters indicated,
a summary of the changes in interest income and interest expense due to average
asset and liability balances (volume) and due to changes in average interest
rates (rate). Changes in interest income and expense which are not attributable
specifically to either volume or rate, are allocated proportionately between
both variances. Nonaccrual loans are excluded from average loans. The impact of
capital securities is not included in this table.
<TABLE>
<CAPTION>
Three months Ended March 31, 2000 Three months Ended March 31, 2000
Compared with December 31, 1999 Compared with March 31, 1999
favorable (unfavorable) favorable (unfavorable)
------------------------------------- -------------------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
- --------------------------------------------------------------- -------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ (57) $ (245) $ (302) $ 2,363 $ 402 $ 2,765
Other short term securities 202 (34) 168 (584) (10) (594)
Investment securities:
Taxable 641 769 1,410 2,543 1,062 3,605
Tax-exempt 128 120 248 336 145 481
Loans 4,117 323 4,440 15,879 1,131 17,010
----------- -------- -------- ----------- -------- -------
Total interest-earning assets 5,031 933 5,964 20,537 2,730 23,267
----------- -------- -------- ----------- -------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings (1,100) (772) (1,872) (5,436) (2,077) (7,513)
Time deposits, over $100,000 (451) (347) (798) (1,701) (441) (2,142)
Other time deposits 52 (53) (1) 277 (126) 151
----------- -------- -------- ----------- -------- -------
Total interest-bearing deposits (1,499) (1,172) (2,671) (6,860) (2,644) (9,504)
Other borrowings (101) (101) (202) (321) (181) (502)
Subordinated debt - - - 36 35 71
----------- -------- -------- ----------- -------- -------
Total interest-bearing liabilities: (1,600) (1,273) (2,873) (7,145) (2,790) (9,935)
----------- -------- -------- ----------- -------- -------
Increase (decrease) in net interest income $ 3,431 $ (340) $ 3,091 $ 13,392 $ (60) $13,332
=========== ======== ======== =========== ======== =======
</TABLE>
The Quarter Ended March 31, 2000 compared to March 31, 1999
-----------------------------------------------------------
Interest income in the first quarter ended March 31, 2000 increased 50.4%
to $69.5 million from $46.2 million in the same period in 1999. This was
primarily due to the $20.5 million favorable volume variance which resulted from
a $941.2 million, or 41.7%, increase in average interest-earning assets over the
comparable prior year. Average loans increased $642.6 million, or 41.0%, to 2.2
billion for the first quarter of 2000 as compared to $1.6 billion for the first
quarter of 1999.
The average yield on interest-earning assets increased 41 basis points to
8.70% in the first quarter of 2000 from 8.29% in the same period of 1999
primarily due to the increase on the yields on loans. Average yields on loans
increased 27 basis points to 9.69% in the three months ended March 31, 2000 from
9.42% for the same period in 1999, primarily as a result of increases in market
rates of interest.
Interest expense, excluding capital securities, in the first quarter of
2000 increased 60.1% to $26.5 million from $16.5 million for the same period in
1999. This increase was due to an increase in average interest-bearing
liabilities and higher interest rates paid on interest-bearing liabilities.
Average interest-bearing liabilities increased 39.6% to $2.5 billion in the
first quarter of 2000 from $1.8 billion in the same period for 1999 due to the
efforts of the Company's relationship managers in generating core deposits from
their client relationships, deposits derived from the activities of the Greater
Bay Trust Company and the Venture Banking Group.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
As a result of the foregoing, the Company's interest rate spread excluding
capital securities was 4.42% in the first quarter of 2000 compared to 4.51% in
the same quarter one year earlier and the net yield on interest-earning assets
increased to 5.39% from 5.32%.
During the first quarter of 2000, average noninterest-bearing deposits
increased to $635.4 million from $431.2 million in the same period in 1999.
Average noninterest-bearing deposits comprised 21.2% of total deposits for the
first quarter in 2000, compared to 20.4% for the same period in 1999.
The Quarter Ended March 31, 2000, compared to December 31, 1999
---------------------------------------------------------------
Interest income increased 9.4% to $69.5 million for the first quarter of
2000, as compared to $63.5 million for the previous quarter. Average interest-
earning assets increased 8.6% in the first quarter of 2000 from $2.9 billion for
the previous quarter. The increase in interest income for the first quarter of
2000, as compared to the prior quarter, was primarily the result of an increase
in the average balances of loans which increased $190.8 million and investment
securities which grew $51.4 million from the prior quarter. The impact of
increases in average balances on loans was enhanced by an increase in the yield
earned on those assets. The yield on the average interest-earning assets
increased 16 basis points to 8.70% in the first quarter of 2000 from 8.54% in
the fourth quarter of 1999, primarily as a result of increases in market rates
of interest.
Interest expense, excluding capital securities, in the first quarter of
2000 increased 12.2% to $26.5 million from $23.6 million in the prior quarter.
The increase is the result of increased interest-bearing liabilities, which rose
to $2.5 billion for the first quarter of 2000, as compared to $2.3 billion for
the prior quarter, and a 23 basis point increase in the cost of funds which
increased to 4.29% in the first quarter of 2000.
As a result of the foregoing, the Company's interest rate spread excluding
capital securities was 4.42% in the first quarter of 2000 compared to 4.49% in
the prior quarter and the net yield on interest-earning assets increased to
5.39% from 5.37%.
During the first quarter of 2000, average noninterest-bearing deposits
increased to $635.4 million from $594.8 million in the fourth quarter of 1999.
Average noninterest-bearing deposits comprised 21.2% of total deposits for the
first quarter in 2000 and for the prior quarter.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Certain client service expenses were incurred by the Company with respect
to its noninterest-bearing liabilities. These expenses include messenger
services, check supplies and other related items and are included in operating
expenses. Had they been included in interest expense, the impact of these
expenses on the Company's net yield on interest-earning assets would have been
as follows for each of the quarters presented.
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------
<S> <C> <C>
Average noninterest bearing demand deposits $ 635,374 $ 431,170
Client service expenses 702 609
Client service expenses, annualized 0.44% 0.57%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 5.25% 5.14%
Impact of client service expense (0.09)% (0.11)%
---------------------------
Adjusted net yield on interest-earning assets (1) 5.17% 5.03%
============================
</TABLE>
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread.
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to control its interest expense.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. Periodic fluctuations in the provision
for loan losses result from management's assessment of the adequacy of the
allowance for loan losses; however, actual loan losses may vary from current
estimates.
Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for
a description of the methodology the Company uses in determining an adequate
allowance for loan losses.
The provision for loan losses for the first quarter of 2000 was $5.3
million, compared to $1.2 million for the first quarter of 1999. In addition, in
connection with the MD Bancshares merger, the Company made an additional
provision for loan losses of $860,000 in the first quarter of 2000 to conform to
the Company's allowance methodology. Nonperforming loans, comprised of
nonaccrual loans, restructured loans, and accruing loans past due 90 days or
more, increased from $5.1 million, or 0.31% of loans outstanding, at March 31,
1999, to $7.0 million or 0.30% of loans outstanding at March 31, 2000.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For further information on nonperforming and classified loans and the
allowance for loan losses, see--"Nonperforming and Classified Assets" herein.
Other Income
Total other income increased to $16.0 million for the first quarter of 2000
compared to $4.6 million for the first quarter of 1999. The following table sets
forth information by category of other income for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
----------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Service charges and other fees 1,351 1,436 1,351 1,192 1,214
Loan and international banking fees $ 1,176 915 1,070 865 673
Trust fees 924 774 768 727 721
ATM network revenue 569 634 789 613 645
Gain on sale of SBA loans 452 72 675 470 813
Gain (loss) on sale of investments, net (1) (23) 4 (9) 61
Other 2,931 4,046 1,876 631 463
------------------------------------------------------------------------------------
Total, recurring 7,402 7,854 6,533 4,489 4,590
Warrant income 8,609 14,278 - 226 4
------------------------------------------------------------------------------------
Total $ 16,011 $ 22,132 $ 6,533 $ 4,715 $ 4,594
====================================================================================
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For the first quarter of 2000 as compared to the same period in 1999, the
increase in other income was a result of $503,000 increase in loan and
international banking fees, a $137,000 increase in service charges and other
fees, and a $203,000 increase in trust fees. These increases were a result of
significant growth in total loans, total deposits and trust assets. The gains on
sale of SBA loans has declined to $452,000 as compared to $813,000 for the same
quarter in 1999. The average premiums paid on SBA loans sold has declined
reducing the gains earned by the Company. Other income for the first quarter of
2000 and the fourth quarter of 1999 includes $2.1 million and $3.1 million in
appreciation recognized on equity securities received in the settlement of a
loan. As discussed further below, the warrant income resulted from the sale of
stock acquired from clients in connection with financing activities.
In November 1999, the voters of San Francisco adopted an ordinance which
prohibits financial institutions in San Francisco from imposing surcharges of
any kind to noncustomers who access automated teller machines to conduct
electronic transactions, including cash withdrawals and fund transfers. Other
cities in California have either adopted or are considering similar proposals.
The Company estimates that approximately $37,000 of ATM network revenue during
the first quarter of 2000 was derived from such type of surcharges in the City
and County of San Francisco. While the implementation of this ordinance has been
blocked through legal challenges and is not material, the adoption of similar
laws in other areas where the Company operates ATMs could cause a more
substantial reduction in ATM network revenue in the future.
Other income for the first quarter of 2000 and the first quarter of 1999
included warrant income of $8.6 million and $4,000, respectively, net of related
employee incentives. The Company holds in excess of 100 warrant positions. We
have historically obtained rights to acquire stock, in the form of warrants, in
certain clients as part of negotiated credit facilities. We may not be able to
realize gains form these equity instruments in future periods due to
fluctuations in the market prices of the underlying common stock of these
companies. The timing and amount of income, if any, from the disposition of
client warrants typically depend upon factors beyond our control, including the
general condition of the public equity markets, levels of mergers and
acquisitions activity, and legal and contractual restrictions on our ability to
sell the underlying securities. Therefore, future gains cannot be predicted with
any degree of accuracy and are likely to vary materially from period to period.
In addition, a significant portion of the income we realize from the disposition
of client warrants may be offset by expenses related to our efforts to build an
infrastructure sufficient to support our present and future business activities,
as well as expenses incurred in evaluating and pursuing new business
opportunities, or by increases to the provision for loan losses.
Operating Expenses
The following table sets forth the major components of operating expenses
for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
---------------------------------------------------
March 31, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 12,835 $ 12,665 $ 11,411
Occupancy and equipment 4,357 3,902 3,413
Legal and other professional fees 920 585 850
Telephone, postage and supplies 864 878 893
Client services 702 628 500
Marketing and promotion 686 685 581
FDIC insurance and regulatory assessments 240 187 183
Directors' fees 153 398 213
Expenses on other real estate owned 10 (53) 30
Other 1,985 2,000 2,368
---------------------------------------------------
Total operating expenses, excluding merger costs 22,752 21,875 20,442
Contribution to the GBB Foundation and related expense, net - 11,837 -
Merger costs 3,881 6,367 -
---------------------------------------------------
Total operating expenses $ 26,633 $ 40,079 $ 20,442
===================================================
Efficiency ratio, excluding trust operations 45.63% 65.62% 55.94%
Efficiency ratio, excluding trust operations and before merger costs 38.81% 35.32% 55.94%
Total operating expenses to average assets* 3.10% 5.01% 3.20%
Total operating expenses to average assets, before
merger costs* 2.65% 2.73% 3.20%
*Annualized
<CAPTION>
At and for the three month periods ended
-------------------------------------------
June 30, March 31,
(Dollars in thousands) 1999 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation and benefits $ 10,862 $ 10,521
Occupancy and equipment 3,160 3,415
Legal and other professional fees 700 659
Telephone, postage and supplies 852 845
Client services 310 609
Marketing and promotion 597 567
FDIC insurance and regulatory assessments 142 139
Directors' fees 91 250
Expenses on other real estate owned 15 21
Other 2,653 1,611
-------------------------------------------
Total operating expenses, excluding merger costs 19,382 18,637
Contribution to the GBB Foundation and related expense, net 323 -
Merger costs 3,965 -
Total operating expenses $ 23,670 $ 18,637
-------------------------------------------
Efficiency ratio, excluding trust operations 74.43% 55.27%
===========================================
Efficiency ratio, excluding trust operations and before merger costs 60.50% 55.27%
Total operating expenses to average assets* 3.98% 3.09%
Total operating expenses to average assets, before
merger costs* 3.26% 3.09%
</TABLE>
*Annualized
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $26.6 million for the first quarter of 2000,
compared to $18.6 million for the first quarter of 1999. The ratio of operating
expenses to average assets, before merger costs, was 2.65% for the first quarter
of 2000 and 3.09% for the first quarter of 1999.
The efficiency ratio is computed by dividing total operating expenses by
net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same
(or greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio, excluding trust
operations and nonrecurring items, for the first quarter of 2000 was 38.81%,
compared to 55.27% for the first quarter of 1999. The Company's efficiency ratio
for the first quarter of 2000 was lowered in part by the impact of the $2.1
million in appreciation on equity securities received in settlement of a loan.
Excluding this income, the Company's efficiency ratio would have been 47.71%.
As indicated by the improvements in the efficiency ratio and ratio of total
operating expenses to average assets, the Company has been able to achieve
increasing economies of scale. For the first quarter of 2000, average assets
increased 40.7% from the first quarter of 1999, while operating expenses,
excluding nonrecurring cost, increased only 22.1%.
Compensation and benefits expenses increased for the first quarter of 2000
to $12.8 million, compared to $10.5 million for the first quarter of 1999. The
increase in compensation and benefits is due primarily to the addition of
personnel to accommodate the growth of the Company.
The increase in occupancy and equipment; telephone, postage, and supplies;
marketing and promotion; and client service expense was related to the Company's
growth.
Income Taxes
The Company's effective income tax rate for the first quarter of 2000 was
40.3%, compared to 39.4% in the first quarter of 1999. The effective rates were
lower than the statutory rate of 42.0% due to tax-exempt income on municipal
securities, state enterprise zone credits and the preferential tax treatment of
the donation of appreciated warrants to the Foundation. The reductions were
partially offset by the impact of merger and other related nonrecurring costs.
FINANCIAL CONDITION
Total assets increased 12.2% to $3.6 billion at March 31, 2000, compared to
$3.2 billion at December 31, 1999. The increase in the first quarter of 2000 was
primarily due to increases in the Company's loan portfolio funded by growth in
deposits.
Loans
Total gross loans increased 7.8% (31.3% annualized) to $2.3 billion at
March 31, 2000, compared to $2.1 billion at December 31, 1999. The increase in
the loan volume during the first three months of 2000 was primarily due to the
continued strength of the economy in the Company's market areas coupled with the
business development efforts of the Company's relationship managers.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, the Company's borrowers could be adversely impacted by a
downturn in these sectors of the economy. This could, in turn, reduce the
demand for loans and adversely impact the borrowers' abilities to repay their
loans, while also decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
--------------------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 956,341 42.6% $ 845,422 40.5% $ 690,330 42.8 %
Team real-Commercial 641,163 28.5 595,499 28.6 451,599 28.0
--------------------------------------------------------------------------------------------
Total commercial 1,597,504 71.1 1,440,921 69.1 1,141,929 70.8
Real estate construction and land 474,916 21.1 459,349 22.0 297,119 18.4
Real estate term - other 117,628 5.2 111,703 5.4 104,400 6.5
Consumer and other 116,880 5.2 128,120 6.1 110,017 6.8
--------------------------------------------------------------------------------------------
Total loans, gross 2,306,928 102.7 2,140,093 102.6 1,653,465 102.5
Deferred fees and discounts, net (11,255) (0.5) (10,604) (0.5) (9,202) (0.6)
--------------------------------------------------------------------------------------------
Total loans, net of
deferred fees 2,295,673 102.2 2,129,489 102.1 1,644,263 101.9
Allowance for loan losses (48,650) (2.2) (44,147) (2.1) (30,748) (1.9)
-------------------------------------------------------------------------------------------
Total loans, net $2,247,023 100.0% $2,085,342 100.0% $1,613,515 100.0%
===========================================================================================
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Banks have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $6,203 $5,516 $ 7,864 $5,578 $4,137
Accruing loans past due 90 days or more 10 51 353 209 -
Restructured loans 743 807 1,492 1,034 951
-------------------------------------------------------------------
Total nonperforming loans 6,956 6,374 9,709 6,821 5,088
Other real estate owned 271 271 515 595 620
-------------------------------------------------------------------
Total nonperforming assets $7,227 $6,645 $10,224 $7,416 $5,708
===================================================================
Nonperforming assets to total loans
and other real estate owned 0.31% 0.31% 0.53% 0.42% 0.35%
Nonperforming assets to total assets 0.20% 0.21% 0.34% 0.27% 0.22%
</TABLE>
At March 31, 2000, the Company had $6.2 million in nonaccrual loans.
Interest income foregone on nonaccrual loans outstanding totaled $311,000 and
$110,000 for the three months ended March 31, 2000 and 1999, respectively.
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
March 31, 2000, OREO acquired through foreclosure had a carrying value of
$271,000, same as December 31, 1999.
The Company had $743,000 and $807,000 of restructured loans as of March 31,
2000 and December 31, 1999, respectively. There were no principal reduction
concessions allowed on restructured loans during the first quarter of 2000 or
1999. Interest income from restructured loans totaled $20,000 and $9,000 for the
three months ended March 31, 2000 and 1999, respectively. Foregone interest
income, which totaled $241,000 and $8,000 for the three months ended March 31,
2000 and 1999, respectively, would have been recorded as interest income if the
loans had accrued interest in accordance with their original terms prior to the
restructurings.
The Company has three classifications for problem loans: "substandard,"
"doubtful" and "loss." Substandard loans have one or more defined weaknesses and
are characterized by the distinct possibility that the Banks will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable; and there is a high possibility of loss of
some portion of the principal balance. A loan classified as "loss" is considered
uncollectible and its continuance as an asset is not warranted.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the classified assets at the dates
indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Substandard $27,720 $28,679 $29,299 $27,203 $19,434
Doubtful 5,772 1,850 2,316 1,579 1,212
Loss - - - - -
Other real estate owned 271 271 515 595 620
-------------------------------------------------------------------
Classified assets $33,763 $30,800 $32,130 $29,377 $21,266
===================================================================
Classified assets to total loans and other real 1.47% 1.45% 1.66% 1.65% 1.29%
estate owned
Allowance for loan losses to total classified assets 144.09% 143.33% 114.21% 112.39% 144.59%
</TABLE>
With the exception of these classified assets, management was not aware of
any loans outstanding as of March 31, 2000 where the known credit problems of
the borrower would cause management to have serious doubts as to the ability of
such borrowers to comply with their present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
that such an environment may have on the Company's loan portfolio. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual, become restructured loans, or other real estate
owned in the future.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio. The allowance is increased by provisions charged against earnings
and reduced by net loan charge-offs. Loans are charged-off when they are deemed
to be uncollectible; recoveries are generally recorded only when cash payments
are received.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
---------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- ---------------------------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period end loans outstanding $2,295,673 $2,129,489 $1,940,662 $1,784,111 $1,647,867
Average loans outstanding $2,208,556 $2,017,723 $1,868,109 $1,721,483 $1,565,961
Allowance for loan losses:
Balance at beginning of period $ 44,147 $ 36,696 $ 33,016 $ 30,748 $ 29,831
Charge-offs:
Commercial (1,694) (1,334) (776) (278) (226)
Real estate construction and land - - - - -
Real estate term - - - - -
Consumer and other (97) (81) (103) (43) (72)
---------------------------------------------------------------------
Total charge-offs (1,791) (1,415) (879) (321) (298)
---------------------------------------------------------------------
Recoveries:
Commercial 127 59 760 218 34
Real estate construction and land - - 1 2 1
Real estate term - - - 1 -
Consumer and other 3 280 43 5 17
---------------------------------------------------------------------
Total recoveries 130 339 804 226 52
---------------------------------------------------------------------
Net charge-offs (1,661) (1,076) (75) (95) (246)
Provision charged to income /(1)/ 6,164 8,527 3,755 2,363 1,163
---------------------------------------------------------------------
Balance at end of period $ 48,650 $ 44,147 $ 36,696 $ 33,016 $ 30,748
=====================================================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.30% 0.21% 0.02% 0.02% 0.06%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.30% 0.07% 0.03% 0.04% 0.06%
Allowance as a percentage of average loans outstanding 2.20% 2.19% 1.96% 1.92% 1.96%
Allowance as a percentage of period end loans outstanding 2.12% 2.07% 1.89% 1.85% 1.87%
Allowance as a percentage of non-performing loans 699.40% 692.61% 377.96% 484.03% 604.32%
</TABLE>
_______________________
(1) Includes $860,000 in the first quarter of 2000, $2,300,000 in the fourth
quarter of 1999 and $400,000 in the second quarter of 1999 to conform practices
to the Company's reserve methodologies, which is included in mergers and
related nonrecurring costs.
The Company employs a systematic methodology for determining its allowance
for loan losses, which includes a monthly review process and monthly adjustment
of the allowance. The Company's process includes a periodic loan by loan review
for loans that are individually evaluated for impairment as well as detailed
reviews of other loans (either individually or in pools). This includes an
assessment of known problem loans, potential problem loans, and other loans that
exhibit indicators of deterioration.
The Company's methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan losses
that management believes is appropriate at each reporting date. Quantitative
factors include the Company's historical loss experience, delinquency and
charge-off trends, collateral values, changes in non-performing loans, and other
factors. Quantitative factors also incorporate known information about
individual loans including borrowers' sensitivity to interest rate movements and
borrowers' sensitivity to quantifiable external factors including commodity and
finished goods prices as well as acts of nature (earthquakes, fires, etc.) that
occur in a particular period.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Qualitative factors include the general economic environment in the
Company's marketplace, and in particular, the state of the technology industries
based in the Silicon Valley and other key industries in the San Francisco Bay
Area. Size and complexity of individual credits in relation to lending officers'
background and experience levels, loan structure, extent and nature of waivers
of existing loan policies and pace of portfolio growth are other qualitative
factors that are considered in the Company's methodology. The Company's
methodology is, and has been, consistently followed. However, as the Company
adds new products, increases in complexity, and expands its geographic coverage,
the Company intends to enhance its methodology to keep pace with the size and
complexity of the loan portfolio. In this regard, the Company has periodically
engaged outside firms to independently assess the Company's methodology, and on
an ongoing basis the Company engages outside firms to perform independent credit
reviews of its loan portfolio. Management believes that the Company's systematic
methodology continues to be appropriate given the Company's size and level of
complexity.
While this methodology utilizes historical and other objective information,
the establishment of the allowance for loan losses and the classification of
loans, is to some extent, based on the judgment and experience of management. In
general, management feels that the allowance for loan losses is adequate as of
March 31, 2000. However, future changes in circumstances, economic conditions or
other factors could cause management to increase or decrease the allowance for
loan losses as necessary.
At March 31, 2000, the allowance for loan losses was $48.7 million,
consisting of a $33.5 million allocated allowance and a $15.2 million
unallocated allowance. The unallocated allowance recognizes the model and
estimation risk associated with the allocated allowances, and management's
evaluation of various conditions, the effects of which are not directly measured
in determining the allocated allowance. The evaluation of the inherent loss
regarding these conditions involves a higher degree of uncertainty because they
are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following at the balance sheet date:
. The strength and duration of the current business cycle and existing
general economic and business conditions affecting our key lending areas;
economic and business conditions affecting our key lending portfolios;
. Seasoning of the loan portfolio, growth in loan volumes and changes in loan
terms; and
. The results of bank regulatory examinations.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and liabilities
to meet the return on investment expectations of its shareholders. The Company
monitors the sources and uses of funds on a daily basis to maintain an
acceptable liquidity position. In addition to liquidity from core deposits and
repayments and maturities of loans and investments, the Banks utilize brokered
deposit lines, sell securities under agreements to repurchase and borrow
overnight federal funds.
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are obtained
from management fees, interest received on its investments and dividends
declared and paid by the Banks. There are statutory and regulatory provisions
that could limit the ability of the Banks to pay dividends to Greater Bay. At
March 31, 2000, the Banks had approximately $62.9 million in the aggregate
available to be paid as dividends to Greater Bay. Management of Greater Bay
believes that such restrictions will not have an impact on the ability of
Greater Bay to meet its ongoing cash obligations. As of March 31, 2000, Greater
Bay did not have any material commitments for capital expenditures.
Net cash provided by operating activities, consisting primarily of net
income and increases in interest payable and other liabilities, totaled $15.3
million and $13.9 million for the three months ended March 31, 2000 and 1999,
respectively. Cash used for investing activities totaled $293.4 million and
$183.0 million for the three months ended March 31, 2000 and 1999, respectivley.
The funds used for investing activities primarily represent increases in loans
and investment securities for each year reported.
For the three months ended March 31, 2000 net cash provided by financing
activities was $370.2 million, compared to $210.0 million for the three months
ended March 31, 2000. Historically, the primary financing activity of the
Company has been through deposits. For the three months ended March 31, 2000 and
1999, deposit gathering activities generated cash of $352.1 million and $218.9
million, respectively. This represents a total of 95.1% and 104.1% of the
financing cash flows for the three months ended March 31, 2000 and 1999,
respectively. The Company has supplemented its financing activities through the
issuance of Trust Preferred Securities and common stock. See "Capital Resources"
for further discussion below.
Capital Resources
Shareholders' equity at March 31, 2000 increased to $232.8 million from
$206.6 million at December 31, 1999. Greater Bay paid dividends of $0.15 and
$0.48 per share during the three months ended March 31, 2000 and the twelve
months ended December 31, 1999, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
In the first quarter of 2000 and the fourth quarter of 1999 the Company
issued 324,324 and 535,000 shares of common stock in a private placement,
respectively. The proceeds from the offering were $11.5 million and $19.0
million, respectively, net of issuance costs. Greater Bay used a portion of the
net proceeds from the offering to supplement the capital of the Banks and
intends to use the remainder for general corporate purposes.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In 1997, the Company issued $20.0 million in TPS to enhance its regulatory
capital base, while also providing added liquidity. In 1998, the Company
completed a second offering of TPS in an aggregate amount of $30.0 million. In
the first quarter of 2000, the Company completed a third offering of TPS in an
aggregate amount of $9.5 million. Under applicable regulatory guidelines, the
TPS qualifies as Tier I capital up to a maximum of 25% of Tier I capital. Any
additional portion of TPS would qualify as Tier 2 capital. As of March 31, 2000,
$59.5 million of the TPS qualified as Tier I capital. As the Company's
shareholders' equity increases, the amount of Tier I capital that can be
comprised of TPS will increase.
The Company is committed to remaining well-capitalized as defined by
regulatory guidelines. To support continued deposit and loan growth the Company
expects to complete a private offering of $41.0 million of 10 3/4% TPS in May
2000. We anticipate that we will be able to leverage this issuance of TPS
and therefore we do not anticipate that the additional TPS would be dilutive to
future net income per share. However, the impact of the additional TPS on net
income per share will depend on a number of factors, including the time period
required to invest the capital funds into earning-assets and the type of assets
funded.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill. Supplementary capital includes
the allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities, certain other capital instruments
and term subordinated debt. The Company's major capital components are
shareholders' equity and TPS in core capital, and the allowance for loan losses
in supplementary capital.
At March 31, 2000, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at March 31, 2000
and the two highest levels recognized under these regulations are as follows.
These ratios all exceeded the well-capitalized guidelines shown below.
<TABLE>
<CAPTION>
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
------ ------------- -------------
<S> <C> <C> <C>
Company 8.92% 10.39% 11.76%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
</TABLE>
In addition, at March 31, 2000, each of the Banks had levels of capital that
exceeded the well-capitalized guidelines.
27
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and an adequate loan
loss reserve (see "--Allowance for Loan Losses" herein).
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in net portfolio values and net interest income under various interest
rate scenarios. The ALCO attempts to manage the various components of the
Company's balance sheet to minimize the impact of sudden and sustained changes
in interest rates on net portfolio value and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in net portfolio value in the event of hypothetical changes in
interest rates and interest liabilities. If potential changes to net portfolio
value and net interest income resulting from hypothetical interest rate swings
are not within the limits established by the Board, the Board may direct
management to adjust its asset and liability mix to bring interest rate risk
within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused its
investment activities on securities with generally medium-term (8 years to 12
years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of its
liabilities. In addition, the Company has utilized an interest rate swap to
manage the interest rate risk of the TPS II securities. This interest rate swap
is not an "ineffective hedge" and is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in net portfolio value of its
cash flows from assets, liabilities and off-balance sheet items in the event of
a range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for off-
balance sheet items. This analysis assesses the risk of loss in market rate
sensitive instruments in the event of sudden and sustained increases and
decreases in market interest rates of 100 basis points. The following table
presents the Company's projected change in net portfolio value for these rate
shock levels as of March 31, 2000. All market rate sensitive instruments
presented in this table are classified as either held to maturity or available
for sale. The Company has no trading securities.
(Dollars in thousands)
Change in Projected Change
--------------------
Interest Rates Net Portfolio Value Dollars Percentage
-------------------------------------------------------------------------
100 basis point rise $ 582,547 $ 10,415 1.82%
Base scenario 572,133 - -
100 basis point decline 563,041 (9,091) -1.59%
28
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The preceding table indicates that at March 31, 2000, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to increase. However, the foregoing
analysis does not attribute additional value to the Company's noninterest-
bearing deposit balances, which have a significantly higher market value during
periods of increasing interest rates.
Net portfolio value is calculated based on the net present value of
estimated cash flows utilizing market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of net portfolio value. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of the net portfolio value. Certain assets, such as adjustable-rate
loans, which represent one of the Company's loan products, have features which
restrict changes in interest rate on a short-term basis and over the life of the
assets. In addition, the proportion of adjustable-rate loans in the Company's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the net portfolio value.
Finally, the ability of many borrowers to repay their adjustable-rate mortgage
loans may decrease in the event of significant interest rate increases.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and liabilities
and their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both assets
and liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: one day or immediate, two days to
six months, seven to twelve months, one to three years, four to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps.
29
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The following table shows interest sensitivity gaps for different intervals
as of March 31, 2000.
<TABLE>
<CAPTION>
Immediate or 2 Days to 7 Months to 1 Year to 4 Years to More than
One Day 6 Months 12 Months 3 Years 5 Years 5 Years
-------------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and Due $ 1,475 $ - $ - $ - $ - $ -
Federal Funds Sold 309,505 - - - - -
Investment Securities - 28,750 27,722 137,075 89,873 455,580
Loans 1,186,082 541,370 81,325 160,248 146,368 182,690
Allowance for Loan - - - - - -
Losses/Unearned Fees
Other Assets - - - - - -
------------------------------------------------------------------------------------------------
Total Assets $1,497,062 $ 570,120 $ 109,047 $ 297,323 $ 236,241 $638,270
================================================================================================
Liabilities and Equity
Deposits $2,472,644 $ 525,245 $ 71,397 $ 10,912 $ 1,366 $ 166
Other Borrowings 14,100 71,024 - 10,000 2,000 -
Trust Preferred Securities - - - - - 59,500
Other Liabilities - - - - - -
Shareholders Equity - - - - - -
------------------------------------------------------------------------------------------------
Total Liab/Equity $2,486,744 $ 596,269 $ 71,397 $ 20,912 $ 3,366 $ 59,666
================================================================================================
Gap $ (989,682) $ (26,149) $ 37,650 $ 276,411 $ 232,875 $578,604
Cumulative Gap $ (989,682) $(1,015,831) $(978,181) $(701,770) $(468,895) $109,709
Cumulative Gap/Total Assets -27.4% -28.2% -27.1% -19.5% -13.0% 3.0%
<CAPTION>
Total Rate Non- Rate
Sensitive Sensitive Total
----------------------------------------------------------
Assets
<S> <C> <C> <C>
Cash and Due $ 1,475 $ 152,826 $ 154,301
Federal Funds Sold 309,505 - 309,505
Investment Securities 739,000 (13,474) 725,526
Loans 2,298,082 1,525 2,299,607
Allowance for Loan - (52,584) (52,584)
Losses/Unearned Fees
Other Assets - 170,881 170,881
---------------------------------------------------------
Total Assets $3,348,062 $ 259,175 $3,607,237
=========================================================
Liabilities and Equity
Deposits $3,081,730 $ 77,370 $3,159,100
Other Borrowings 97,124 - 97,124
Trust Preferred Securities 59,500 - 59,500
Other Liabilities - 58,698 58,698
Shareholders Equity - 232,815 232,815
---------------------------------------------------------
Total Liab/Equity $3,238,354 $ 368,883 $3,607,237
=========================================================
Gap $ 109,708 $(109,708) $ -
Cumulative Gap $ 109,708 $ - $ -
Cumulative Gap/Total Assets 3.0% - -
</TABLE>
The foregoing table indicates that the Company had a one year gap of $978.2
million, or 27.1% of total assets, at March 31, 2000. In theory, this would
indicate that at March 31, 2000, $978.2 million more in liabilities than assets
would reprice if there was a change in interest rates over the next year. Thus,
if interest rates were to increase, the gap would tend to result in a higher net
interest margin. Conversely, if interest rates decreased, the gap may result in
decreases net interest margin. However, changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary significantly
while the timing of repricing of both the asset and its supporting liability can
remain the same, thus impacting net interest income. This characteristic is
referred to as basis risk and, generally, relates to the repricing
characteristics of short-term funding sources such as certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected
next twelve month net interest income and net income has been evaluated through
an interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of March 31, 2000, the analysis indicates that the Company's
net interest income would increase a maximum of 11.64% (excluding CCB) if rates
rose 200 basis points immediately and would decrease a maximum of 11.27%
(excluding CCB) if rates declined 200 basis points immediately. In addition, the
results indicate that notwithstanding the Company's gap position, which would
indicate that the net interest margin increases when rates rise, the Company's
net interest margin increases during rising rate periods due to the basis risk
imbedded in the Company's interest- bearing liabilities. The Company has
revised the assumptions used in performing this analysis following a detailed
review of its ALCO pricing history. As a result, the anticipated impact of
interest rate changes on the Company's net interest income has increased since
December 31, 1998.
The above quantified evaluations exclude the impact of CCB because that
institution had not been converted to risk management system as to net portfolio
value and interest rate shock simulation analysis at March 31, 2000. The
Company has performed a preliminary analysis of CCB's risk profile and has
determined that CCB's exposure to interest rate risk is equal to or lower than
that of the Company as a whole.
30
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors would
include management's and ALCO's actions to mitigate the impact to the Company
and the impact of the Company's credit risk profile during periods of
significant interest rate movements.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
Year 2000 State of Readiness
The Company's mission critical systems successfully responded to the
century date change. Accordingly, the Company's core banking systems, including
the application software for its deposit, loan and trust computer systems, as
well as the electronic funds transfers system with the Federal Reserve, were
fully operational and accurately processing customer information and
transactions. During 2000, the Company will monitor its systems and those of its
major vendors, suppliers and clients over the coming months to ensure continued
compliance.
Recent Accounting Developments
In April 1999, the Financial Accounting Standards Board ("FASB") reached
tentative conclusions on the future of the pooling-of-interests method of
accounting for business combinations. These tentative decisions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method. The FASB agreed that the
purchase method should be applied prospectively to business combination
transactions that are initiated after the final standard is issued. The FASB has
issued an exposure draft during the third quarter of 1999 and expects a final
standard will be issued and become effective in the fourth quarter of 2000. A
portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels. A
change in the accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
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